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 | $ | 230,000 | $ | 284,000 | ||
Variable costs: | ||||||
Cost of goods sold | 76,000 | 142,000 | ||||
Selling & administrative | 27,500 | 56,000 | ||||
Contribution margin | $ | 126,500 | $ | 86,000 | ||
Fixed expenses: | ||||||
Fixed corporate costs | 66,000 | 81,000 | ||||
Fixed selling and administrative | 18,000 | 27,000 | ||||
Total fixed expenses | $ | 84,000 | $ | 108,000 | ||
Operating income | $ | 42,500 | $ | (22,000 | ) | |
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 $48,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
1.)
Increase by 10% | ||||
T-1 | T-1 | |||
Sales | $ 230,000 | $ 253,000 | ||
Variable costs: | ||||
Cost of goods sold | $ 76,000 | $ 83,600 | ||
Selling & administrative | $ 27,500 | $ 30,250 | ||
Contribution margin | $ 126,500 | $ 139,150 | ||
Fixed expenses | ||||
Fixed corporate costs | $ 147,000 | 66000+81000 | $ 147,000 | |
Fixed selling & administrative | $ 45,000 | 18000+27000 | $ 45,000 | |
Total fixed expenses | $ 192,000 | $ 192,000 | ||
Operating income | $ (65,500) | $ (52,850) | ||
Existing operating income | $ 20,500 | 42500-22000 | $ 20,500 | 42500-22000 |
Change in operating income | $ (86,000) | $ (73,350) |
2)
T-1 | T-2 | |||
Sales | $ 230,000 | $ 284,000 | ||
Contribution margin | $ 126,500 | $ 86,000 | ||
P.V.ratio | Contribution margin | *100 | Contribution margin | *100 |
Sales | Sales | |||
P.V.ratio | 55.00% | 30.28% | ||
Sales of T-2 | $ 284,000 | |||
P.V.ratio | 30.28% | |||
Loss of contribution from T-2 | $ 86,000.00 | |||
P.V Ratio of T-1 | 55.00% | |||
Sales that would be needed to cover make up the financial loss from dropping T-2 | $ 156,363.64 | |||
Loss/ P.V.Ratio | ||||
Original sales of T-1 | $ 230,000 | |||
% change required | 67.98% |
3)
Loss of contribution from T-2 | $ 86,000.00 | |
Less: Reduction in Fixed costs | $ (48,500.00) | |
Net Loss of contribution from T-2 | $ 37,500.00 | |
P.V Ratio of T-1 | 55.00% | |
Sales that would be needed to cover make up the financial loss from dropping T-2 | $ 68,181.82 | |
Loss/ P.V.Ratio | ||
Original sales of T-1 | $ 230,000 | |
% change required | 29.64% |
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Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known...
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...
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...
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...
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