# Barbour Corporation, located in Buffalo, New York, is a retailer of high tech products and is...

## 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 have 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 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.

T-1 T-2
Sales $220,000$276,000
Variable cost of goods sold 74,000 138,000
Contribution margin 146,000 138,000
Expenses:
Fixed corporate costs 64,000 79,000
Variable selling and administration 25,000 54,000
Fixed selling and administration 16,000 25,000
Total expenses 105,000 158,000
Operating income (loss) $41,000$(20,000)

Required:

1. Find the expected change in annual operating income by dropping T-2 and selling only T-1.

 Net loss on discontinuing T-2

2. By what percentage would sales from T-1 have to increase in order to make up the financial loss from dropping T-2?

 Required percent increase in sales of T-1

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 $45,500?  Required percent increase in sales of T-1 ## Dropping a Product: The financial impact that dropping a product will have is always equal to the loss in its contribution margin minus savings in avoidable fixed costs and plus or minus the impact of any opportunity costs. ## Answer and Explanation: 1) The effect on the profit will be: $71,900 Loss in T-2 manufacturing contribution margin $(138,000) Increase in T-1 manufacturing contribution margin$14,600 ($146,000 x 0.10) Saving in variable selling and administrative cost$54,000 Increase in T-1 variable selling and administrative cost $(2,500) Saving in fixed costs (fixed costs cannot be avoided and will only be reallocated if the product is dropped)$0 Decrease in profit if T-2 is dropped

2) Sales would from T-1 have to increase by an amount high enough to compensate for the loss of $138,000 -$54,000 = $84,000 contribution margin from T-2: $152,728 T-1 manufacturing contribution margin $146,000 Variable selling and administration 25,000 Contribution margin T-1$121,000 Sales revenue T-1 $220,000 Contribution margin ratio 55% Increase in sales that will yield$84,000 in contribution margin

3) T-1 sales must now generate $84,000 -$45,500 = $38,500 in additional contribution margin: $70,000 Contribution margin T-1 $121,000 Sales revenue T-1$220,000 Contribution margin ratio 55% Increase in sales that will yield \$38,500 in contribution margin