Barbour Corporation, located in Buffalo, New York, is a retailer of hightech pro

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 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% next year; the firm’s cost structure will remain the same. T-1 T-2 Sales $ 255,000 $ 304,000 Variable cost of goods sold 81,000 152,000 Contribution margin $ 174,000 $ 152,000 Expenses: Fixed corporate costs 71,000 86,000 Variable selling and administration 21,000 61,000 Fixed selling and administration 23,000 32,000 Total expenses $ 115,000 $ 179,000 Operating income $ 59,000 $ (27,000)

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

2. 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 $45,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)

Explanation / Answer

T1 Detail Amount T2 Detail Amount Total Sales 255000 304000 559000 Variable cost of Goods sold 81000 152000 Variable selling & admn. 21000 61000 Total Variable cost 102000 213000 315000 Contribution margin 153000 91000 244000 P/V ratio 60% Fixed corporate costs 71000 86000 Fixed selling & admn. 23000 32000 Total Fixed cost 94000 118000 212000 Operating income 59000 -27000 32000 1) If T2 is close Fixed corporate cost will remain unchanged for whole firm at = 71000+86000 , = 157000 2) Further All variable costs associated with T2 will be eliminated 3) fixed selling & administrative will also remain unchanged at =55000 After drop of T2 Sale of T1 will increase by 10% = existing sale 255000 Add: 10 % rise 25500 New sale revenue 280500 Contribution margin ratio 60% Contribution earned 168300 Less: Fixed corporate 157000 Less: Fixed selling and administrative 55000 = 23000+32000 operating Income (loss) -43700 Operating income before closure of T2 32000 Change in Operating income -75700

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