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

question 26

Multiple Choice

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?

• A) Operating income will increase $30,000.
• B) Operating income will increase $10,000.
• C) Operating income will decrease $10,000.
• D) Operating income will decrease $80,000.

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Definitions:

Contingent Demand

Demand for a product or service that depends on the demand for another product or service.

Custom Cabinets

Bespoke cabinetry designed and built to fit the specific measurements and requirements of a particular space.

Green Enterprises

Denotes businesses that prioritize environmental sustainability in their operations, products, or services, often with a focus on minimizing ecological impact.

Derived Demand Inventory

Inventory levels that are determined by the demand for finished goods; it reflects the need for raw materials and components based on the finished product's demand.