Faros Hats inc has two product lines batting helmets and foodball helmets. the i

Question

Faros Hats inc has two product lines batting helmets and foodball helmets. the income statement data for most recent year is as follow:

                                 Total.                            batting helmet.              foodball helmet

Sale revenue           $850,000.                        $500,000                        $350,000

Variable cost.          $(440,000).                      $(150,000).                     $(290,000

Contribution.           $410,000.                         $350,000.                       $60,000

Fix cost.                  $(190,000).                       $(90,000).                      $(100,000)

Operating income    $220,000                          $260,000.                       $40,000

what is the effect of dropping foodball helmets line of the operating income of the company. Assumed that fix cost remain unchange and that there would be no advance effect on other sales.

A. operating income will decrease by $60,000

B. operating income will decrease by $350,000

C. operating income will increase by $90,000

D. operating income will increase by $40,000

Explanation / Answer

Dropping football helmets will decrease the amount of operating income by the contribution margin of football helmet. Since the fixed cost remains same, there will not be any other effect on the operating income.

Contribution margin for football helmet = $60,000

Hence, Answer is A. operating income will decrease by $60,000

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