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 percent next year, but the firm's cost structure will remain the same. Sales Variable costs: Cost of goods sold Belling & administrative Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative Total fixed expenses Operating income T-1 $ 275,000 85,000 25,000 $ 165,000 75,000 27,000 $ 102,000 $ 63,000 T-2 $ 320,000 160,000 65,000 $ 95,000 90,000 36,000 $ 126,000 $ (31,000) 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 $51,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
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 percent next year, but the firm's cost structure will remain the same. Sales Variable costs: Cost of goods sold Belling & administrative Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative Total fixed expenses Operating income T-1 $ 275,000 85,000 25,000 $ 165,000 75,000 27,000 $ 102,000 $ 63,000 T-2 $ 320,000 160,000 65,000 $ 95,000 90,000 36,000 $ 126,000 $ (31,000) 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 $51,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 percent next year, but
the firm's cost structure will remain the same.
Sales
Variable costs:
Cost of goods sold
Selling & administrative
Contribution margin
Fixed expenses:
Fixed corporate costs
Fixed selling and administrative
Total fixed expenses
Operating income
T-1
$ 275,000
1. Net loss on discontinuing T-2
2 Required % increase in sales from T-1
3. Required % increase in sales from T-1
85,000
25,000
$ 165,000
75,000
27,000
$102,000
$ 63,000
%
T-2
$ 320,000
%
160,000
65,000
$ 95,000
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 $51,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)
90,000
36,000
$ 126,000
$ (31,000)
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