Faros Hats, Etc - If $50,000 of Fixed Costs Will Be Eliminated by Helmets

question 66

Multiple Choice

Faros Hats, Etc. has two product lines-baseball helmets and football helmets. Income statement data for the most recent year follow: $\begin{array}{|l|r|r|r|} \hline&{\text { Total }} & \text { Baseball Helmets } & \text { Football Helmets } \\\hline \text { Sales revenue } & \$ 850,000 & \$ 500,000 & \$ 350,000 \\\hline \text { Variable expenses } & (530,000 & (250,000 & (280,000 \\\hline \text { Contribution margin } & \$ 320,000 & \$ 250,000 & \$ 70,000 \\\hline \text { Fixed expenses } & (180,000 & (90,000) & (90,000 \\\hline \text { Operating income (loss) } & \$ 140,000 & \$ 160,000 & \$(20,000 \\\hline\end{array}$
- If $50,000 of fixed costs will be eliminated by dropping the Football Helmets line, how will dropping Football Helmets affect the operating income of the company?

• A) Operating income will increase by $50,000.
• B) Operating income will increase by $70,000.
• C) Operating income will decrease by $90,000.
• D) Operating income will decrease by $20,000.

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Definitions:

Differentiate

The act of differentiating a product or service from competitors in order to appeal more to a specific target audience.

Loyal Customers

Individuals who consistently prefer and choose a particular brand or product over competitors, often due to satisfaction, rewards, or emotional connections.

Marketing Expenditures

The total costs associated with activities aimed at creating demand for products or services, including advertising, promotions, and distribution.

Mobile Phone

A mobile phone that enables users to make and receive calls using a radio frequency connection as they move around within a service provider's coverage area.