Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|}
\hline&{\text { Total }} & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & (530,000 & (250,000 & (280,000 \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\hline \text { Fixed expenses } & (180,000 & (90,000) & (90,000 \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$(20,000 \
\hline
\end{array}$
- Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $100,000 per year, how will operating income be affected?

Question

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|} 
\hline&{\text { Total }} & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & (530,000 & (250,000 & (280,000 \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\hline \text { Fixed expenses } & (180,000 & (90,000) & (90,000 \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$(20,000 \
\hline
\end{array}$
- Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $100,000 per year, how will operating income be affected?

Quizplus · Accepted Answer

If the Football Helmets line is dropped, the company loses the $70,000 contribution margin but saves $90,000 in fixed expenses, resulting in a net loss of $20,000. However, renting the space for $100,000 increases income by $100,000, leading to a net increase in operating income of $30,000 ($100,000 - $70,000).

Faros Hats, Etc - Assuming the Football Helmets Line Is Dropped, Total Fixed