Cost Management 6th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 11

Product-Profitability Analysis Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products 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 dropT-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.

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
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 $45,000
4. What strategic factors should be considered