3. Nacho Company is a retailer of durable, light-weight backpackbag and consistently known for their high-quality and innovation.The firm is considering dropping the Pink backpack product and onlyto sell the traveler backpack. Nacho Company allocatesfixed costs (both corporate and selling/administrative) toproducts based on sales revenue. When thepresident of the company saw the product-line income statements(presented below), he agreed that the Pink product should bedropped. If this is done, sales of traveller are expected toincrease by 20% next year; the firm's cost structure will remainthe 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 annualoperating income by dropping the Pink product and selling only thetraveler product. Show calculations to support your answer.
2. What strategic factors should beconsidered?
