Question

Check my work 5 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. 0.31 points Т-1 T-2 eBook $276,000 Sales Variable costs Cost of goods sold Selling & administrative Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative Total fixed expenses $220,000 References 138,000 54,000 $84,000 74,000 25,000 $121,000 64,000 16,000 $ 80,000 79,000 25,000 $104,000 41,000 (20,000) Operating income 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 $45,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).) LO

Answer 1

1.

	T1	T2
Sales	$220,000	$276,000
Less: Variable cost of goods sold	74,000	138,000
variable selling and administration	25,000	54,000
Contribution Margin	$121,000	$84,000
Contribution Margin ration = Contribution Margin / Sales	55.00%	30.43%

Incremental contribution margin from T1 if T2 is dropped (121000*10%) = $12,100

Net effect of discontinuing T2 ($84,000 - $12,100) = $71,900

2.

2. Loss of contribution margin T2 = Gain on contribution Margin T1

$840000 = 121000 x X%

X = 69.42%

3.

3. Loss of contribution margin T2 = Gain on contribution Margin T1

$84000 - 45,500 = 121000 x X%

X = 31.82%

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