Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ If $50,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will dropping Football Helmets affect 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: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ If $50,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will dropping Football Helmets affect the operating income of the company?

Quizplus · Accepted Answer

Dropping the Football Helmets line will eliminate its contribution margin of $70,000 but also reduce fixed costs by $50,000, resulting in a net decrease in operating income of $20,000.

Faros Hats, Etc If $50,000 of Fixed Costs Will Be Eliminated by Dropping