Armor Sports, Inc. has two product lines-batting helmets and football helmets. The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 950,000 & \$ 600,000 & \$ 350,000 \
\hline \text { Variable costs } & ( 490,000 & ( 200,000 & ( 290,000 ) \
\hline \text { Contribution margin } & \$ 460,000 & \$ 400,000 & \$ 60,000 \
\hline \text { Fixed costs } & ( 170,000 & ( 70,000 & ( 100,000 ) \
\hline \text { Operating income (loss) } & \$ 290,000 & \$ 330,000 & \$ ( 40,000 ) \
\hline
\end{array}$$ What is the effect of dropping football helmets line on the operating income of the company? (Assume that fixed costs remain unchanged and that there would be no adverse effect on other sales.)

Question

Armor Sports, Inc. has two product lines-batting helmets and football helmets. The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 950,000 & \$ 600,000 & \$ 350,000 \
\hline \text { Variable costs } & ( 490,000 & ( 200,000 & ( 290,000 ) \
\hline \text { Contribution margin } & \$ 460,000 & \$ 400,000 & \$ 60,000 \
\hline \text { Fixed costs } & ( 170,000 & ( 70,000 & ( 100,000 ) \
\hline \text { Operating income (loss) } & \$ 290,000 & \$ 330,000 & \$ ( 40,000 ) \
\hline
\end{array}$$ What is the effect of dropping football helmets line on the operating income of the company? (Assume that fixed costs remain unchanged and that there would be no adverse effect on other sales.)

Quizplus · Accepted Answer

From the income statement data, we can see that football helmets have a negative operating income of -$60,000. Dropping the football helmets line would lead to a decrease in revenue by $500,000 and a decrease in variable costs by $370,000 (70% of $500,000). However, the fixed costs would remain unchanged at $240,000.

So, the new operating income would be:

Operating income = Revenue - Variable costs - Fixed costs

If we drop the football helmets line:

Operating income = $1,200,000 (Batting helmets revenue) - $370,000 (reduction in variable costs) - $240,000 (fixed costs) 
= $590,000

Compared to the original operating income of $650,000, the operating income would decrease by $60,000 if the football helmets line is dropped. Hence, the correct answer is C.

Armor Sports, Inc What Is the Effect of Dropping Football Helmets Line on Helmets