Sports 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, how would dropping the Football Helmets line affect operating income?

Question

Sports 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, how would dropping the Football Helmets line affect operating income?

Quizplus · Accepted Answer

To calculate the effect of dropping the Football Helmets line on operating income, we need to subtract the fixed costs of the Football Helmets line from its contribution margin, then subtract this amount from the company's total operating income:

Football Helmets contribution margin = $320,000 - $240,000 = $80,000
Fixed costs of Football Helmets = $80,000
Effect on operating income = ($80,000) - ($110,000) = ($30,000)

Therefore, dropping the Football Helmets line would decrease operating income by $30,000.