Benjamin Sports Inc. has two product lines—softball helmets and football helmets

Question

Benjamin Sports Inc. has two product lines—softball helmets and football helmets. Income statement data for the most recent year follow:

Total

Softball Helmets

Football Helmets

Sales revenue

$850,000

$500,000

$350,000

Variable expenses

(530,000)

(250,000)

(280,000)

Contribution margin

$320,000

$250,000

$70,000

Fixed expenses

(180,000)

(90,000)

(90,000)

Operating income (loss)

$140,000

$160,000

$(20,000)

Assuming 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 income of the company?

A) Operating income will increase by $20,000.

B) Operating income will increase by $90,000.

C) Operating income will decrease by $70,000.

D) Operating income will decrease by $350,000.

Total

Softball Helmets

Football Helmets

Sales revenue

$850,000

$500,000

$350,000

Variable expenses

(530,000)

(250,000)

(280,000)

Contribution margin

$320,000

$250,000

$70,000

Fixed expenses

(180,000)

(90,000)

(90,000)

Operating income (loss)

$140,000

$160,000

$(20,000)

Explanation / Answer

If football helmets are dropped, we will lose the contribution earned on football helmets. By dropping the above, we would still have to incur fixed costs, and hence we can conclude that by dropping football helmets operating income would reduce by 70000 and the revised operating income would be 70000 ( 140000 - 70000)

Correct Answer: C

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