HASF Corporation, located in Buffalo, New York, is a retailer of high-tech products known for its excellent quality and innovation. Recently the firm conducted a relevant cost analysis of one of its product lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the purchase costs are increasing. The firm might drop T-2 and sell only T-1.

Barbour allocates fixed costs to products on the basis of sales revenue. When the president of

Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are expected to increase by 10 percent next year; the firm's cost structure will remain the same.

T-1 T-2

Sales $200,000 $260,000

Variable cost of goods sold 70,000 130,000

Contribution margin $130,000 $130,000

Expenses

Fixed corporate costs 60,000 75,000

Variable selling and administration 20,000 50,000

Fixed selling and administration 12,000 21,000

Total expenses $ 92,000 $146,000

Operating income $ 38,000 $ (16,000)

Required

1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.

2. What strategic factors should be considered?