11-36    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 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 percent next year; the firm’s cost structure will remain the same.

 

  Sales	T-1 $200,000	Â	T-2 $260,000	Â
Variable cost of goods sold	70,000	Â	130,000	Â
Contribution margin	$130,000	Â	$130,000	Â
Expenses	Â	Â	Â	Â
Fixed corporate costs	60,000	Â	75,000	Â
Variable selling and administration	20,000	Â	50,000	Â
Fixed selling and administration	12,000	Â	21,000	Â
Total expenses	$ 92,000	Â	$146,000	Â
Operating income	$ 38,000	Â	$ (16,000)	Â

 

 

Required

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

2.    What strategic factors should be considered?