Luther Company, located in Largeville, Kansas, is a retailer of durable, light-weight luggage products known for their high-quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, Kryptonite and Meteoerite. The sales for Meteorite are decreasing and the purchase costs are increasing. The firm is considering dropping Meteorite products and only selling Kryptonite. Luther Company allocates fixed costs to products on the basis of sales revenue. When the president of Luther saw the income statement, he agreed that Meteorite should be dropped. If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm's cost structure will remain the same. Required:
1. Find the expected change in annual operating income by dropping Meteorite and selling only Kryptonite.
2. What strategic factors should be considered?

Question

Luther Company, located in Largeville, Kansas, is a retailer of durable, light-weight luggage products known for their high-quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, Kryptonite and Meteoerite. The sales for Meteorite are decreasing and the purchase costs are increasing. The firm is considering dropping Meteorite products and only selling Kryptonite. Luther Company allocates fixed costs to products on the basis of sales revenue. When the president of Luther saw the income statement, he agreed that Meteorite should be dropped. If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm's cost structure will remain the same.  Required:
1. Find the expected change in annual operating income by dropping Meteorite and selling only Kryptonite.
2. What strategic factors should be considered?

Quizplus · Accepted Answer

The Answer of Luther Company, located in Largeville, Kansas, is a retailer of durable, light-weight luggage products known for their high-quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, Kryptonite and Meteoerite. The sales for Meteorite are decreasing and the purchase costs are increasing. The firm is considering dropping Meteorite products and only selling Kryptonite. Luther Company allocates fixed costs to products on the basis of sales revenue. When the president of Luther saw the income statement, he agreed that Meteorite should be dropped. If this is done, sales of Kryptonite are expected to increase by 15% next year; the firm's cost structure will remain the same.  Required:
1. Find the expected change in annual operating income by dropping Meteorite and selling only Kryptonite.
2. What strategic factors should be considered?

Luther Company, Located in Largeville, Kansas, Is a Retailer of Durable