Sherman Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 1,050,000 & \$ 700,000 & \$ 350,000 \
\hline \text { Variable costs } & \underline { ( 500,000) } & ( 200,000 ) & ( 300,000 ) \
\hline \text { Contribution margin } & \$ 550,000 & \$ 500,000 & \$ 50,000 \
\hline \text { Fixed costs } & ( 182,000 )&( 90,000 ) & ( 92,000 ) \
\hline \text { Operating income (loss) } & \$ 368,000 & \$ 410,000 & \$ ( 42,000 ) \
\hline
\end{array}$$ Assuming the football helmets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $120,000 per year,how will operating income be affected?

Question

Sherman Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 1,050,000 & \$ 700,000 & \$ 350,000 \
\hline \text { Variable costs } & \underline { ( 500,000) } & ( 200,000 ) & ( 300,000 ) \
\hline \text { Contribution margin } & \$ 550,000 & \$ 500,000 & \$ 50,000 \
\hline \text { Fixed costs } & ( 182,000 )&( 90,000 ) & ( 92,000 ) \
\hline \text { Operating income (loss) } & \$ 368,000 & \$ 410,000 & \$ ( 42,000 ) \
\hline
\end{array}$$ Assuming the football helmets line is dropped,total fixed costs remain unchanged,and the space formerly used to produce the line is rented for $120,000 per year,how will operating income be affected?

Quizplus · Accepted Answer

Dropping the football helmets line eliminates its $42,000 loss. Renting out the space adds $120,000 in revenue. The net effect is an increase in operating income of $162,000 ($120,000 - $42,000 loss avoided). However, the question asks how operating income will be affected compared to the current operating income of $368,000. The increase of $162,000 is not directly compared to the $368,000 but rather shows the change due to the decision. The correct interpretation is that operating income increases by the amount saved from the loss plus the additional rental income, which is a positive impact on the company's financials.

Sherman Hats,Inc Assuming the Football Helmets Line Is Dropped,total Fixed Costs Remain