Faros Hats,Etc.has two product lines-baseball helmets and football helmets.Income statement data for the most recent year follow:
$$\begin{array} { | l | l | l | l | }
\hline &{ \text { Total } } & { \text { Baseball Helmets } } &{ \text { Football Helmets } } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable expenses } & ( 550,000 ) & ( 250,000 ) & ( \underline { 300,000 ) } \
\hline \text { Contribution margin } & \$ 290,000 & \$ 250,000 & \$ 40,000 \
\hline \text { Fixed expenses } & ( 160,000 ) & ( 70,000 ) & ( 90,000 ) \
\hline \text { Operating profit (loss) } & \$ 130,000 & \$ 180,000 & ( \$ 50,000 ) \
\hline
\end{array}$$
Assume fixed costs remain unchanged and that there would be no adverse effect on other sales.What will be the effect of dropping Football Helmets line on the operating profit of the company?

Question

Faros Hats,Etc.has two product lines-baseball helmets and football helmets.Income statement data for the most recent year follow:
$$\begin{array} { | l | l | l | l | } 
\hline &{ \text { Total } } &  { \text { Baseball Helmets } } &{ \text { Football Helmets } } \
\hline \text { Sales revenue } & \$ 840,000 & \$ 500,000 & \$ 340,000 \
\hline \text { Variable expenses } & ( 550,000 ) & ( 250,000 ) & ( \underline { 300,000 ) } \
\hline \text { Contribution margin } & \$ 290,000 & \$ 250,000 & \$ 40,000 \
\hline \text { Fixed expenses } & ( 160,000 ) & ( 70,000 ) & ( 90,000 ) \
\hline \text { Operating profit (loss) } & \$ 130,000 & \$ 180,000 & ( \$ 50,000 ) \
\hline
\end{array}$$
Assume fixed costs remain unchanged and that there would be no adverse effect on other sales.What will be the effect of dropping Football Helmets line on the operating profit of the company?

Quizplus · Accepted Answer

The contribution margin of the football helmets line is calculated as follows:

Contribution margin = Sales revenue - Variable costs
Contribution margin = $800,000 - $400,000
Contribution margin = $400,000

If the company drops the football helmets line, it will lose its contribution margin of $400,000.
Therefore, the operating profit will decrease by the fixed costs of the football helmets line, which are $40,000.
Hence, the operating profit will decrease by $40,000.

Faros Hats,Etc Assume Fixed Costs Remain Unchanged and That There Would Be