Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $$\begin{array} { | l | r | r | r | }
\hline &{ \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ 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: $$\begin{array} { | l | r | r | r | } 
\hline &{ \text { Total } } & \text { Baseball Helmets } & \text { Football Helmets } \
\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \
\hline \text { Variable expenses } & ( 530,000 ) & ( 250,000 ) & ( 280,000 ) \
\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \
\text { Fixed expenses } & ( 180,000 ) & ( 90,000 ) & ( 90,000 ) \
\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$ ( 20,000 \
\hline
\end{array}$$ 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, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $100,000 per year, then the operating income will increase by $10,000. This is because the company will no longer have to incur the variable expenses associated with producing the Football Helmets line, and it will receive $100,000 in rent for the space that was formerly used to produce the line.

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