Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales. What will be the effect of dropping Football Helmets line on the operating income of the company?

Question

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ Assuming fixed costs remain unchanged, and that there would be no adverse effect on other sales. What will be the effect of dropping Football Helmets line on the operating income of the company?

Quizplus · Accepted Answer

Dropping the Football Helmets line will result in the elimination of the corresponding variable and fixed costs associated with that product line. The contribution margin lost from dropping the product line is $70,000, but this is offset by the $90,000 of fixed costs saved by eliminating the product line. Therefore, the net effect on operating income is a decrease of $70,000.

Faros Hats, Etc Assuming Fixed Costs Remain Unchanged, and That There Would Be