Faros Hats,Inc What Is the Effect of Dropping Football Helmets Line on Statement

question 76

Multiple Choice

Faros Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } \hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \\\hline \text { Sales revenue } & \$ 1,050,000 & \$ 700,000 & \$ 350,000 \\\hline \text { Variable costs } & \underline { ( 530,000 } & \$ 250,000 ) & ( 280,000 ) \\\hline \text { Contribution margin } & \$ 520,000 & \$ 450,000 & \$ 70,000 \\\hline \text { Fixed costs } & ( 200,000) & (90,000 ) & ( 110,000 ) \\\hline \text { Operating income (loss) } & \$ 320,000 & \$ 360,000 & \$ ( 40,000 ) \\\hline\end{array}$$ What is the effect of dropping football helmets line on the operating income of the company? (Assume that fixed costs remain unchanged and that there would be no adverse effect on other sales.)

• A) Operating income will increase by $40,000.
• B) Operating income will increase by $90,000.
• C) Operating income will decrease by $70,000.
• D) Operating income will decrease by $350,000.

---

Definitions:

Monopolistically Competitive

Describes a market structure where many firms sell products that are similar but not identical, allowing for product differentiation and some degree of market power.

Normal Profit

The minimum level of profit needed for a company to remain competitive in the market, equating to its opportunity costs.

Economic Profit

The surplus remaining after total costs (including both explicit and implicit costs) are subtracted from total revenues, reflecting the opportunity costs of all resources.

Monopolistically Competitive

A market structure characterized by many firms selling differentiated products with few barriers to entry.