Profitability Analysis Barbour Corporation, located in Buffalo, New York, is a retailer of hightech products 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 statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are expected to increase by 10 percent next year; the firm’s cost structure will remain the same.
| T-1 | T-2 |
Sales | $200,000 | $260,000 |
Variable cost of goods sold | 70,000 | 130,000 |
Contribution margin | $130,000 | $130,000 |
Expenses |
|
|
Fixed corporate costs | 60,000 | 75,000 |
Variable selling and administration | 20,000 | 50,000 |
Fixed selling and administration | 12,000 | 21,000 |
Total expenses | $ 92,000 | $146,000 |
Operating income | $ 38,000 | $ (16,000) |
Required
1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.
2. What strategic factors should be considered?
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