Question

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 Variable costs: $255,000 $304,000 81,000 21,000 Cost of Selling & administrative Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative Total fixed expenses goods sold 152,000 61,000 91,000 $153,000 71,000 86,000 23,000 94,000 32,000 $118,000 $ (27,000) Operating income 59,000 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).) 1 2. Required % increase in sales of T-1 % 3. Required % increase in sales from T-1 %

Answer 1

1) expected change in annual operating income
			T1	T2
SALE			255000	304000
variable cost
cost of goods sold			81000	152000
selling & adm			21000	61000
total variable cost			102000	213000
contribution margin			153000	91000
contribution margin ratio			60%	29.93%
Fixed cost
corporated cost			71000	86000
selling & adm			23000	32000
total			94000	118000
income after dropping T2
sales (255000*110%)				280500
variable cost 40%*280500				112200
contribution margin				168300
fixed cost				212000
net operating income				-43700
operating income before T2 dropping				32000
change in operating income after T2 drop				-75700
2) operating income after T2 drop = 32000
contribution margin req = 32000+212000= 244000
sale = 244000/0.60 = 406666.7
percentage increase in sale = (406666.7-255000)/255000
percentage increase in sale = 59.48%
3) contribution margin req = 32000+(212000-45000) =199000
sale req = 199000/0.60 = 331666.7
T1 sale =255000
%increase in sale = (331666.7-255000)/255000 = 30.07%