Barbour Corporation, located in Buffalo, New York, is a retailer of hightech pro
ID: 2401095 • Letter: B
Question
Barbour Corporation, located in Buffalo, New York, is a retailer of hightech products and is 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 fxed 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% next year; the firm's cost structure will remain the same. 300,000 340000 Variable cost of goods sold 80,000 Variable selling and administration Fxed selling and administration Total expenses Operaing income Required: Find the expected change in annual operating income by dropping T-2 and selling only T-1 By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) 3 What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed costs can be reduced by $58,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)Explanation / Answer
Answer
Working:
T-1
T-2
Total
Sales
$ 330,000.00
$ 330,000.00
Variable cost of goods sold
$ 99,000.00
$ 99,000.00
Contribution margin
$ 231,000.00
$ 231,000.00
Expenses:
Fixed corporate cost
$ 80,000.00
$ 95,000.00
$ 175,000.00
Variable selling & admin cost
$ 16,500.00
$ 16,500.00
Fixed selling & admin
$ 32,000.00
$ 41,000.00
$ 73,000.00
Total expenses
$ 128,500.00
$ 136,000.00
$ 264,500.00
Operating Income (Loss) if T2 is dropped
$ 102,500.00
$ (136,000.00)
$ (33,500.00)
Operating Income (Loss) if T2 is not dropped
$ 83,000.00
$ (36,000.00)
$ 47,000.00
Answer:
Change in Annual Operating Income by dropping T-2 & Selling only T-1 =
Net Loss on Discontinuing T -2
[33500 + 47000]
$ 80,500.00
Working
A
Sales
$ 300,000.00
B
Variable COGS
$ 90,000.00
C
Variable selling
$ 15,000.00
D=A-B-C
Contribution margin
$ 195,000.00
E=(D/A) x 100
CM ratio
65%
Answer
A
Loss on Dropping T - 2
$ 80,500.00
B
CM Ratio
65%
C=A/B
Sales required to cover above loss
$ 123,846.15
D
Current Sale
$ 300,000.00
E=(C/D) x 100
Required % Increase in Sales of T -1
41.28%
Working and Answer
T-1
T-2
Total
Sales
$ 330,000.00
$ 330,000.00
Variable cost of goods sold
$ 99,000.00
$ 99,000.00
Contribution margin
$ 231,000.00
$ 231,000.00
Expenses:
Fixed corporate cost
$ 80,000.00
$ 36,500.00
$ 116,500.00
Variable selling & admin cost
$ 16,500.00
$ 16,500.00
Fixed selling & admin
$ 32,000.00
$ 41,000.00
$ 73,000.00
Total expenses
$ 128,500.00
$ 77,500.00
$ 206,000.00
A
Operating Income (Loss) if T2 is dropped
$ 102,500.00
$ (77,500.00)
$ 25,000.00
B
Operating Income (Loss) if T2 is not dropped
$ 83,000.00
$ (36,000.00)
$ 47,000.00
C=B - A
Loss on dropping T - 2
$ 22,000.00
D
CM Ratio
65%
E = C/D
Sales required to cover above loss
$ 33,846.15
F
Original Sales
$ 300,000.00
G = (E/F) x 100
Required % Increase in Sales of T -1
11.28%
T-1
T-2
Total
Sales
$ 330,000.00
$ 330,000.00
Variable cost of goods sold
$ 99,000.00
$ 99,000.00
Contribution margin
$ 231,000.00
$ 231,000.00
Expenses:
Fixed corporate cost
$ 80,000.00
$ 95,000.00
$ 175,000.00
Variable selling & admin cost
$ 16,500.00
$ 16,500.00
Fixed selling & admin
$ 32,000.00
$ 41,000.00
$ 73,000.00
Total expenses
$ 128,500.00
$ 136,000.00
$ 264,500.00
Operating Income (Loss) if T2 is dropped
$ 102,500.00
$ (136,000.00)
$ (33,500.00)
Operating Income (Loss) if T2 is not dropped
$ 83,000.00
$ (36,000.00)
$ 47,000.00
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