Michael's Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 1,100,000 & \$ 700,000 & \$ 400,000 \
\hline \text { Variable costs } & ( 480,000 & \underline { ( 200,000 ) } & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 620,000 & \$ 500,000 & \$ 120,000 \
\hline \text { Fixed costs } & ( 220,000 )& ( 70,000 ) & ( 150,000 ) \
\hline \text { Operating income (loss) } & \$ 400,000 & \$ 430,000 & \$ ( 30,000 ) \
\hline
\end{array}$$ If $90,000 of fixed costs will be eliminated by dropping the football helmets line,how will dropping football helmets affect operating income of the company?

Question

Michael's Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 1,100,000 & \$ 700,000 & \$ 400,000 \
\hline \text { Variable costs } & ( 480,000 & \underline { ( 200,000 ) } & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 620,000 & \$ 500,000 & \$ 120,000 \
\hline \text { Fixed costs } & ( 220,000 )& ( 70,000 ) & ( 150,000 ) \
\hline \text { Operating income (loss) } & \$ 400,000 & \$ 430,000 & \$ ( 30,000 ) \
\hline
\end{array}$$ If $90,000 of fixed costs will be eliminated by dropping the football helmets line,how will dropping football helmets affect operating income of the company?

Quizplus · Accepted Answer

Dropping the football helmets line will eliminate its $30,000 operating loss, which directly improves the overall operating income by the same amount. Eliminating $90,000 of fixed costs associated with football helmets doesn't directly increase operating income by $90,000 because the sales revenue and variable costs of the football helmets line are also removed from the calculation. The net effect is the removal of the $30,000 loss.

Michael's Hats,Inc If $90,000 of Fixed Costs Will Be Eliminated by Dropping