Protector,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $\begin{array}{|l|r|r|r|}
\hline& \text { Total } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable costs } & (480,000 & (200,000 & (280,000 \\hline \text { Contribution margin } & \$ 360,000 & \$ 300,000 & \$ 60,000 \
\hline \text { Fixed costs } & (170,000 & \$(80,000 & (90,000 \
\hline \text { Operating income }(\text { loss }) & \$ 190,000 & \$ 220,000 & \$(30,000) \
\hline
\end{array}$ Assuming the football helmets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $100,000 per year,how will operating income be affected?

Question

Protector,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $\begin{array}{|l|r|r|r|} 
\hline& \text { Total } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable costs } & (480,000 & (200,000 & (280,000 \\hline \text { Contribution margin } & \$ 360,000 & \$ 300,000 & \$ 60,000 \
\hline \text { Fixed costs } & (170,000 & \$(80,000 & (90,000 \
\hline \text { Operating income }(\text { loss }) & \$ 190,000 & \$ 220,000 & \$(30,000) \
\hline
\end{array}$ Assuming the football helmets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $100,000 per year,how will operating income be affected?

Quizplus · Accepted Answer

If the football helmets line is dropped, the company will lose the $60,000 contribution margin but save the $90,000 fixed costs, resulting in a net increase of $30,000. Additionally, renting the space for $100,000 will further increase income by $100,000, leading to a total increase of $130,000. However, since the fixed costs remain unchanged, the net effect is an increase of $40,000 in operating income.

Protector,Inc Assuming the Football Helmets Line Is Dropped,total Fixed Costs Remain