USE THE FOLLOWING INFORMATION FOR THE NEXT 4 QUESTIONS: Sports Hats, Etc. has tw
ID: 2567068 • Letter: U
Question
USE THE FOLLOWING INFORMATION FOR THE NEXT 4 QUESTIONS: Sports Hats, Etc. has two product lines: baseball helmets and football helmets. Income statement data for the most recent year follow TotalBaseball Helmets Football Helmets $150,000 S460,000 S31 Sales revenue Variable expenses 75,000 Contribution margin Fixed expenses 105,000 Operating income (loss) 26. Assuming fixed costs remain unchanged, how would dropping the Football Helmets line affect operating income? A. Increase in total operating income of $8,000 B. Increase in total operating income of $38,000 C. Decrease in total operating income of $30,000 D. Decrease in total operating income of $150,000 27. If $20,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will operating income be affected? A. Increase $12,000 B. Increase $20,000 C. Decrease $10,000 D. Decrease $14,000 28. Assuming the Football Helmets line is dropped, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $45,000 per year, how will operating income be affected? A. Increase $15,000 B. Increase $37,000 C. Decrease $7,000 D. Decrease $37,000Explanation / Answer
Solution:
26) Correct option is C. Decrease in total operating income of $30,000
Explanation --- As per information given in the question, fixed costs are remain unchanged so the fixed cost will continue to incur whether Football Helmet drop or not.
The only affect will be on Sales, variable cost and contribution margin.
Hence if the football helmet dropped the Contribution Margin will be a loss to the company and the company’s operating profit will be decrease by $30,000
27) The correct option is C. Decrease of $10,000
As explained above,
Loss of Contribution Margin
$30,000
Less: Saving in Fixed Costs
($20,000)
Net Loss from dropping of Football helmet
$10,000
Hence, the company’s operating income will decrease by $10,000. The correct option is C. Decrease of $10,000
28) The correct option is A. Increase $15,000
Rental Income (Opportunity Benefit)
$45,000
Less: Loss of Contribution Margin from Football Helmet
($30,000)
Net Income from dropping of Football Helmet
$15,000
Hence, the company’s overall operating income will increase by $15,000
The correct option is A. Increase $15,000
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Loss of Contribution Margin
$30,000
Less: Saving in Fixed Costs
($20,000)
Net Loss from dropping of Football helmet
$10,000
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