Question

3. Nacho Company is a retailer of durable, light-weight backpack bag and consistently known for their high-quality and innovation. The firm is considering dropping the Pink backpack product and only to sell the traveler backpack. Nacho Company allocates fixed costs (both corporate and selling/administrative) to products based on sales revenue. When the president of the company saw the product-line income statements (presented below), he agreed that the Pink product should be dropped. If this is done, sales of traveller are expected to increase by 20% next year; the firm's cost structure will remain the same.

	Traveller					Pink
Sales	$	20,000					$	32,000
Cost of goods sold (all variable)		9,000						16,000
Gross margin		11,000						16,000
Operating Expenses:
Fixed corporate costs		6,000						9,000
Variable selling and administrative expenses		2,200						5,900
Fixed selling and administrative expenses		1,200						1,800
Total Operating Expenses		9,400						16,700
Operating income (loss)	$	1,600					$	(700	)

Required:

1. Find the expected change in annual operating income by dropping the Pink product and selling only the traveler product. Show calculations to support your answer.

2. What strategic factors should be considered?

Answer 1

for formulas and calculations, refer to the image below -

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