Barbour Corp, lcoated in Buffalo is a retaier of high end tech products and is known for its excellent quality and innovasion. Recently, firm conduced a relevant cost analsyis of one of its product lines that has 2 producs T-1 and T-2. The sales for T-2 aredecreasing and the purchase cost are increasing. The firm might drop T-2 and sell only T-1. Company allocates fixed costs to products on the basis of the sales revenue. When the president of company saw the income statement (see below) , he agreed that T2 should be dropped. If T-2 is dropped, sales of T-1 are expected to increase by 10% next years, but the firm's cost structure will remain the same. T-1 T-2 Sales $220,000 $276,000 Variables Costs: Cost of Goods Sold $74,000 $138,000 Selling & Administrative $25,000 $54,000 Contribution Margin $121,000 $84,000 Fixed Expenses: Fixed Corporate Costs $64,000 $79,000 Fixed Selling & Administrative $16,000 $25,000 Total Fixed Cost $80,000 $104,000 Operating Income $41,000 -$20,000 Required: 1. Find the expected change in the 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 finacial loss from dropping T-2? 3. What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed can be reduced by 45,000? (2 decima points)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Barbour Corp, lcoated in Buffalo is a retaier of high end tech products and is known for its excellent quality and innovasion. Recently, firm conduced a relevant cost analsyis of one of its product lines that has 2 producs T-1 and T-2. The sales for T-2 aredecreasing and the purchase cost are increasing. The firm might drop T-2 and sell only T-1.

Company allocates fixed costs to products on the basis of the sales revenue. When the president of company saw the income statement (see below) , he agreed that T2 should be dropped. If T-2 is dropped, sales of T-1 are expected to increase by 10% next years, but the firm's cost structure will remain the same.

	T-1	T-2
Sales	$220,000	$276,000
Variables Costs:
Cost of Goods Sold	$74,000	$138,000
Selling & Administrative	$25,000	$54,000

Contribution Margin	$121,000	$84,000

Fixed Expenses:
Fixed Corporate Costs	$64,000	$79,000
Fixed Selling & Administrative	$16,000	$25,000
Total Fixed Cost	$80,000	$104,000

Operating Income	$41,000	-$20,000

Required:

1. Find the expected change in the 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 finacial loss from dropping T-2?

3. What is the required percentage increase in sales from T-1 to compensate for lost margin from T-2, if total fixed can be reduced by 45,000? (2 decima points)

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