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 increasing. The firm might drop T-2 and sell only T-1 to increase by 10% next year, the firm's cost structure will remain the same lines that has only two products, T-1 and T-2. The sales for T-2 are decreasing and the purchase costs are 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 T-2 Sales Variable cost of goods sold $ 200,000 260,000 130,000 70,000 Manufacturing contribution margin S 130,000 130,000 Other expenses Fixed corporate costs Variable selling and administration Fixed selling and administration 60,000 20,000 12,000 75,000 50,000 21,000 Total other expenses $ 92,000 146,000 Operating income S 38,000 (16,000) 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).) ured % increase in 0 Type here to search

Explanation / Answer

a. Current Operating Income =$38000-$16000=$22000 New Sale of T-1 =$20000X1.10 =$220000 New Variable Cost of Goods Sold =$70000/$200000)X$220000=$77000 New Variable Selling & Administration Expense =$20000/200000)X$220000=$22000 New Operating Income= New Sale of T 1 - New Variable Cost of Goods Sold -New Variable selling & Adminstration Expense - Total Fixed Cost =$220000-$77000-$22000-$60000-$75000-$12000-$21000= -$47000 There would be a net loss of $47000. Hence, the Operating income dropped by $69000 ($22000+$47000) b. Contribution Margin Ratiofor T1=(Sales-Variable Cost)/ Sales =($200000-$70000-$20000)/$200000 =$110000/$200000=55% Expected Sales= ( Contribution lost for T2+Fixed Cost allocated for T2 + Fixed Allocated for T1)/Contribution Margin Ratio =($80000+$60000+ $75000+$12000+$21000)/55% =$248000/55%= $450909 Percentage increase in Sales= ( Expected Sales-Current Sales) =(Expected Sales- Current Sales)/Current Sales =($450909-$200000)/$200000 =125.455% C. Contribution Margin Ratiofor T1=(Sales-Variable Cost)/ Sales =($200000-$70000-$20000)/$200000 =$110000/$200000=55% Expected Sales= ( Contribution lost for T2+Fixed Cost allocated for T2 + Fixed Allocated for T1- Fixed Cost reduced)/Contribution Margin Ratio =($80000+$60000+ $75000+$12000+$21000-$45000)/55% =$203000/55%= $369091 Percentage increase in Sales= ( Expected Sales-Current Sales) =(Expected Sales- Current Sales)/Current Sales =($369091-$200000)/$200000 =84.545%

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