Head Bucket, Inc. has two product lines-batting helmets and football helmets. The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable costs } & ( 440,000 & ( 150,000 & ( 290,000 ) \
\hline \text { Contribution margin } & \$ 400,000 & \$ 350,000 & \$ 50,000 \
\hline \text { Fixed costs } & ( 162,000 & ( 70,000 & \$ 92,000 ) \
\hline \text { Operating income (loss) } & \$ 238,000 & \$ 280,000 & \$ ( 42,000 ) \
\hline
\end{array}$$ 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 batting helmets, operating income will be ________.

Question

Head Bucket, Inc. has two product lines-batting helmets and football helmets. The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } 
\hline &  { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable costs } & ( 440,000 & ( 150,000 & ( 290,000 ) \
\hline \text { Contribution margin } & \$ 400,000 & \$ 350,000 & \$ 50,000 \
\hline \text { Fixed costs } & ( 162,000 & ( 70,000 & \$ 92,000 ) \
\hline \text { Operating income (loss) } & \$ 238,000 & \$ 280,000 & \$ ( 42,000 ) \
\hline
\end{array}$$ 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 batting helmets, operating income will be ________.

Quizplus · Accepted Answer

If the football helmet line is dropped, the variable expenses for football helmets will be zero, leading to a decrease in total variable expenses by $600,000. Total fixed costs will remain the same at $2,000,000.

Therefore, the contribution margin will increase by $600,000, and the new contribution margin for batting helmets will be $1,800,000 ($1,200,000 + $600,000). If the production of batting helmets is doubled, the new total sales for batting helmets will be $3,200,000 ($1,600,000 x 2).

The calculation of operating income is:
Operating income = Total contribution margin - Total fixed expenses
Operating income = ($1,800,000 x 2) - $2,000,000
Operating income = $3,600,000 - $2,000,000
Operating income = $1,600,000

Therefore, the operating income will be $1,600,000 if the football helmet line is dropped and the production of batting helmets is doubled. Option C is the correct answer.

Head Bucket, Inc Assuming the Football Helmet Line Is Dropped, Total Fixed Costs