Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: 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:  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

To calculate the effect of dropping the football helmet line, we need to calculate the contribution margin of the football helmets, which is the difference between the sales revenue and variable costs.

Contribution margin for football helmets = $300,000 - $270,000 = $30,000

Operating income for the company = $275,000

If the football helmets line is dropped, the fixed costs of $100,000 will remain unchanged, but the contribution margin from the football helmets line will be eliminated.

So the new operating income will be:

New operating income = Operating income - Contribution margin of football helmets
New operating income = $275,000 - $30,000 = $245,000

Therefore, the operating income will decrease by $70,000 (Option C).