Question

Crash​ Sports, Inc. has two product lineslong dashbatting helmets and football helmets. The income statement data for the most recent year is as​ follows: Total Batting Helmets Football Helmets Sales revenue $ 850 comma 000 $ 500 comma 000 $ 350 comma 000 Variable costs ​(480 comma 000​) ​(200 comma 000​) ​(280 comma 000​) Contribution margin $ 370 comma 000 $ 300 comma 000 $ 70 comma 000 Fixed costs ​(160 comma 000​) ​(70 comma 000​) ​(90 comma 000​) Operating income​ (loss) $ 210 comma 000 $ 230 comma 000 ​$(20 comma 000​) If $ 50 comma 000 of fixed costs will be eliminated by dropping the football helmets​ line, how will dropping football helmets affect operating income of the​ company

Answer 1

Answer:

The operating income of the company is reduced by $20,000

Explanation:

Provided information, we have,

Particulars                    Total                Batting Helmet     Football Helmet

Sales Revenue           $850,000            $500,000             $350,000

Variable Cost             ($480,000)          ($200,000)           ($280,000)

Contribution                $370,000            $300,000               $70,000

Fixed Costs                 ($160,000)            ($70,000)             ($90,000)

Operating income      $210,000            $230,000              ($20,000)

Since there is a loss in football helmets if there, production is stopped, then fixed cost will be eliminated up-to $50,000 of that product.

in that case total operating profit will be as follows:

Operating profit from Batting helmets = $230,000

Less: unavoidable fixed cost of Football helmet = ($90,000 - $50,000) = ($40,000)

Net operating profit = $190,000

Since, current net operating income = $210,000

The operating income of the company is reduced by $20,000 and therefore, the production of football helmets shall not be dropped.