Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech 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 statements (see below), he agreed that T-2 should be dropped. If T-2 is dropped, sales of T-1 are expected to increase by 10% next year, but the firm's cost structure will remain the same.
| T-1 | T-2 | |
|---|---|---|
| Sales | $245,000 | $296,000 |
| Variable costs: | ||
| Cost of goods sold | 79,000 | 148,000 |
| Selling & administrative | 19,000 | 59,000 |
| Contribution margin | $147,000 | $89,000 |
| Fixed expenses: | ||
| Fixed corporate costs | 69,000 | 84,000 |
| Fixed selling and administrative | 21,000 | 30,000 |
| Total fixed expenses | $90,000 | $114,000 |
| Operating income | $57,000 | $(25,000) |
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 $53,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34) ..)
| 1. | |||
|---|---|---|---|
| 2. | Required % increase in sales of T-1 | % | |
| 3. | Required % increase in sales from T-1 | % |
| Barbour Corporation | ||||
| Current contribution margin income statement | T-1 | T-2 | Total | Note |
| Sales | 245,000.00 | 296,000.00 | 541,000.00 | A |
| Less: Variable costs | ||||
| The variable cost of goods sold | 79,000.00 | 148,000.00 | 227,000.00 | |
| Variable selling and admin expense | 19,000.00 | 59,000.00 | 78,000.00 | |
| Contribution margin | 147,000.00 | 89,000.00 | 236,000.00 | B |
| Less: Fixed costs | ||||
| Fixed corporate costs | 69,000.00 | 84,000.00 | 153,000.00 | |
| Fixed selling and admin expense | 21,000.00 | 30,000.00 | 51,000.00 | |
| Operating Income (loss) | 57,000.00 | (25,000.00) | 32,000.00 | C |
| Contribution margin % | 60.00% | 30.07% | D=B/A | |
| Increase in T-1 sales by 10% | 24,500.00 | E=A*10% | ||
| Increase in T-1 Contribution margin by | 14,700.00 | F=E*D | ||
| Answer 1 | Incremental analysis for Discontinuation Decision | |||
| Contribution margin lost if T-2 Discontinued | 89,000.00 | See B | ||
| Less: Increase in T-1 Contribution margin | 14,700.00 | See F | ||
| Operating Income will decrease by | 74,300.00 | G=B-F | ||
| Answer 2 | Total | |||
| Contribution margin lost if T-2 Discontinued. | 89,000.00 | See B | ||
| Contribution margin % of T1 | 60.00% | See D | ||
| Increase in sales of T1 | 148,333.33 | H=B/D | ||
| Current sales of T1 | 245,000.00 | See A | ||
| Increase % | 60.54% | I=H/A | ||
| Answer 3 | Total | |||
| Contribution margin lost if T-2 Discontinued. | 89,000.00 | See B | ||
| More minor: decrease in fixed costs | 53,000.00 | J | ||
| Net financial loss | 36,000.00 | K=B-J | ||
| Contribution margin % of T1 | 60.00% | See D | ||
| Increase in sales of T1 | 60,000.00 | L=K/D | ||
| Current sales of T1 | 245,000.00 | See A | ||
| Increase % | 24.49% | M=L/A | ||
Great breakdown! It really helped me understand how to solve the problem.
Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known...