Barbour Corporation located in Buffalo New York is a retaile

Barbour Corporation, located in Buffalo, New York, is a retailer of hightech 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 fxed costs to products on the basis of sales revenue. When the president of Barbour saw the income statement, he agreed that T-2 should be dropped. If this is done, sales of T-1 are expected to increase by 10% next year; the firm\'s cost structure will remain the same. 300,000 340000 Variable cost of goods sold 80,000 Variable selling and administration Fxed selling and administration Total expenses Operaing income Required: Find the expected change in annual operating income by dropping T-2 and selling only T-1 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 $58,500? (Enter your answer as a percentage rounded to 2 decimal places (i.e. 0.1234 should be entered as 12.34).)

Solution

Answer

Working:

T-1

T-2

Total

Sales

$                           330,000.00

$                   330,000.00

Variable cost of goods sold

$                             99,000.00

$                     99,000.00

Contribution margin

$                           231,000.00

$                  231,000.00

Expenses:

Fixed corporate cost

$                             80,000.00

$               95,000.00

$                   175,000.00

Variable selling & admin cost

$                             16,500.00

$                     16,500.00

Fixed selling & admin

$                             32,000.00

$               41,000.00

$                     73,000.00

Total expenses

$                           128,500.00

$             136,000.00

$                   264,500.00

Operating Income (Loss) if T2 is dropped

$                           102,500.00

$          (136,000.00)

$                   (33,500.00)

Operating Income (Loss) if T2 is not dropped

$                             83,000.00

$             (36,000.00)

$                     47,000.00

Answer:

Change in Annual Operating Income by dropping T-2 & Selling only T-1 =

Net Loss on Discontinuing T -2

[33500 + 47000]

$                     80,500.00

Working

A

Sales

$                     300,000.00

B

Variable COGS

$                        90,000.00

C

Variable selling

$                        15,000.00

D=A-B-C

Contribution margin

$                     195,000.00

E=(D/A) x 100

CM ratio

65%

Answer

A

Loss on Dropping T - 2

$                             80,500.00

B

CM Ratio

65%

C=A/B

Sales required to cover above loss

$                           123,846.15

D

Current Sale

$                           300,000.00

E=(C/D) x 100

Required % Increase in Sales of T -1

41.28%

Working and Answer

T-1

T-2

Total

Sales

$                           330,000.00

$                   330,000.00

Variable cost of goods sold

$                             99,000.00

$                     99,000.00

Contribution margin

$                           231,000.00

$                   231,000.00

Expenses:

Fixed corporate cost

$                             80,000.00

$               36,500.00

$                   116,500.00

Variable selling & admin cost

$                             16,500.00

$                     16,500.00

Fixed selling & admin

$                             32,000.00

$               41,000.00

$                     73,000.00

Total expenses

$                           128,500.00

$               77,500.00

$                   206,000.00

A

Operating Income (Loss) if T2 is dropped

$                           102,500.00

$             (77,500.00)

$                     25,000.00

B

Operating Income (Loss) if T2 is not dropped

$                             83,000.00

$             (36,000.00)

$                     47,000.00

C=B - A

Loss on dropping T - 2

$                     22,000.00

D

CM Ratio

65%

E = C/D

Sales required to cover above loss

$                     33,846.15

F

Original Sales

$                   300,000.00

G = (E/F) x 100

Required % Increase in Sales of T -1

11.28%

	T-1	T-2	Total
Sales	$                           330,000.00		$                   330,000.00
Variable cost of goods sold	$                             99,000.00		$                     99,000.00
Contribution margin	$                           231,000.00		$                  231,000.00
Expenses:
Fixed corporate cost	$                             80,000.00	$               95,000.00	$                   175,000.00
Variable selling & admin cost	$                             16,500.00		$                     16,500.00
Fixed selling & admin	$                             32,000.00	$               41,000.00	$                     73,000.00
Total expenses	$                           128,500.00	$             136,000.00	$                   264,500.00
Operating Income (Loss) if T2 is dropped	$                           102,500.00	$          (136,000.00)	$                   (33,500.00)
Operating Income (Loss) if T2 is not dropped	$                             83,000.00	$             (36,000.00)	$                     47,000.00