Head Bucket,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | }
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 820,000 & \$ 500,000 & \$ 320,000 \
\hline \text { Variable costs } & ( 430,000 & ( 150,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 390,000 & \$ 350,000 & \$ 40,000 \
\hline \text { Fixed costs } & ( 160,000 & ( 70,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 230,000 & \$ 280,000 & \$ ( 50,000 ) \
\hline
\end{array}$$ 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: $$\begin{array} { | l | r | r | r | } 
\hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 820,000 & \$ 500,000 & \$ 320,000 \
\hline \text { Variable costs } & ( 430,000 & ( 150,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 390,000 & \$ 350,000 & \$ 40,000 \
\hline \text { Fixed costs } & ( 160,000 & ( 70,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 230,000 & \$ 280,000 & \$ ( 50,000 ) \
\hline
\end{array}$$ 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 company will no longer have any revenue or cost associated with that product line.
- The total fixed costs will remain unchanged, meaning that the $1,800,000 of fixed costs will still need to be covered by the remaining product line(s).
- If the space formerly used to produce the football helmets is used to double the production of batting helmets, this will increase the revenue from the batting helmet line.
- The contribution margin per unit for batting helmets is $40 ($60 selling price - $20 variable cost).
- Doubling the production of batting helmets means that the company will sell 20,000 units (10,000 original units + 10,000 additional units).
- The increased revenue from the additional units will be $800,000 (20,000 units x $40 contribution margin per unit).
- The total operating expenses for the remaining product line(s) will be $1,800,000 (the fixed costs remain unchanged). 
- Therefore, the operating income for the year will be $800,000 - $1,800,000 = -$1,000,000 if the football helmet line is dropped and no action is taken to increase revenue.
- However, if the company uses the additional space to double the production of batting helmets, the additional revenue generated will be enough to cover the fixed costs and generate a positive operating income of $540,000.

Thus, the best choice is C.

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