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 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-2 $ 295,000 89,000 $336,000 168,000 Sales Variable cost of goods sold Contribution margin Expenses $ 206,000 168,000 Fixed corporate costs Variable selling and administration Fixed selling and administration 79,000 29,000 31,000 94,000 69,000 40,000 Total expenses $139,000 $ 203,000 Operating income $ 67,000 (35,000) Required 1. Find the expected change in annual operating income by dropping T-2 and selling only T-1 et loss o n discontinuing T-2 $ 81,300

Explanation / Answer

Sales                 300,000.00      340,000.00 Variable cost of goods                   90,000.00      170,000.00 Contribution Margin                 210,000.00      170,000.00 Expenses Fixed corporation costs                   80,000.00         95,000.00 variable Selling & Adm Exp                   15,000.00         70,000.00 Fixed selling & Adm Exp                   32,000.00         41,000.00 Total expenses                 127,000.00      206,000.00 Operating Income                   83,000.00      (36,000.00)    47,000.00 ( net operating Income-B T1 Sales ( increase by 10%)                 330,000.00 Variable cost of goods ( increase by 10%)                   99,000.00 Contribution Margin                 231,000.00 Expenses Fixed corporation costs ( based on sales revenue so increase by 10%)                   88,000.00 variable Selling & Adm Exp ( increase by 10%)                   16,500.00 Fixed selling & Adm Exp ( based on sales revenue so increase by 10%)                   35,200.00 Total expenses                 139,700.00 Operating Income A                   91,300.00 Expected Change A-B - Increase in operating profit    44,300.00

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