Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: Assuming the Football Helmet line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the Football Helmet line is used to double the production of Baseball Helmets, how will operating income be affected?

Question

Sports Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow:  Assuming the Football Helmet line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the Football Helmet line is used to double the production of Baseball Helmets, how will operating income be affected?

Quizplus · Accepted Answer

Dropping the Football Helmet line would eliminate its contribution margin of $85,000, but fixed costs would not change, so operating income would decrease by $85,000. However, doubling the production of Baseball Helmets would increase its contribution margin by $130,000 ($260,000 - $130,000) while increasing variable costs by $30,000 per year ($15 per helmet x 2,000 additional helmets). Thus, operating income would increase by $130,000 - $30,000 = $100,000. The net effect on operating income would be an increase of $100,000 - $85,000 = $15,000.