Question

HW CH 11 6 Saved Help Save & Exit Sbmit Check my work 2 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. 7.5 points 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 eBook Sales Variable costs: $270,000 $316, 000 Cost of goods sold Selling&administrative 84,000 37,500 $148.500 158,000 64,000 94, 00 Print Contribution margin Fixed expenses: Fixed corporate costs Fixed selling and administrative 74,000 26,000 100,000 48,500 89,000 35,000 $124, 000 (30,000) References Total fixed expenses 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 $49,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34)) 2. Required % increase in sales of T-1 Required % increase in sales from T-1 3.

Answer 1

1. Expected Change in Annual Opertaing Income By Dropping T-2 and Selling only T-1

Particulars	T-1
Sales	297000
Variable Cost:
Cost of goods sold	(92400)
Selling and Adminstrative	(41250)
Contribution Margin	163350
Contribution Margin (%)	55%
Fixed Cost:
Fixed Corporate Costs	(163000)
Fixed Selling and Administrative	(61000)
Operating Income	(60650)
Operating Income Earlier	18500
Change in Operating Income	(79150)

1. To make up from the financial losses due to drop off of T-2, Sales of T-1 has to be increased by,

Sales Earlier of T1 = 270000

Profit/(Loss) by only Producing T1 without increment in Sales = (75,500)

Sales to be increased in order to maintain Same Profit

=(75500/55%)/270000*100

=50.84%

1. If Fixed Cost can be reduced by $49500,

Sales Earlier of T1 = 270000

Profit/(Loss) by only Producing T1 without increment in Sales = (26,000)

Sales to be increased in order to maintain Same Profit

=(26000/55%)/270000*100

=17.51%