Question

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.

	T-1	T-2
Sales	$245,000	$296,000
Variable costs:
Cost of goods sold	79,000	148,000
Selling & administrative	19,000	59,000
Contribution margin	$147,000	$89,000
Fixed expenses:
Fixed corporate costs	69,000	84,000
Fixed selling and administrative	21,000	30,000
Total fixed expenses	$90,000	$114,000
Operating income	$57,000	$(25,000)

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 $53,000? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34) ..)

1.
2.	Required % increase in sales of T-1		%
3.	Required % increase in sales from T-1		%

Answer 1

Barbour Corporation
Current contribution margin income statement	T-1	T-2	Total	Note
Sales	245,000.00	296,000.00	541,000.00	A
Less: Variable costs
The variable cost of goods sold	79,000.00	148,000.00	227,000.00
Variable selling and admin expense	19,000.00	59,000.00	78,000.00
Contribution margin	147,000.00	89,000.00	236,000.00	B
Less: Fixed costs
Fixed corporate costs	69,000.00	84,000.00	153,000.00
Fixed selling and admin expense	21,000.00	30,000.00	51,000.00
Operating Income (loss)	57,000.00	(25,000.00)	32,000.00	C
Contribution margin %	60.00%	30.07%		D=B/A
Increase in T-1 sales by 10%	24,500.00			E=A*10%
Increase in T-1 Contribution margin by	14,700.00			F=E*D
Answer 1	Incremental analysis for Discontinuation Decision
Contribution margin lost if T-2 Discontinued			89,000.00	See B
Less: Increase in T-1 Contribution margin			14,700.00	See F
Operating Income will decrease by			74,300.00	G=B-F
Answer 2			Total
Contribution margin lost if T-2 Discontinued.			89,000.00	See B
Contribution margin % of T1			60.00%	See D
Increase in sales of T1			148,333.33	H=B/D
Current sales of T1			245,000.00	See A
Increase %			60.54%	I=H/A
Answer 3			Total
Contribution margin lost if T-2 Discontinued.			89,000.00	See B
More minor: decrease in fixed costs			53,000.00	J
Net financial loss			36,000.00	K=B-J
Contribution margin % of T1			60.00%	See D
Increase in sales of T1			60,000.00	L=K/D
Current sales of T1			245,000.00	See A
Increase %			24.49%	M=L/A