Michael's Hats,Inc If $90,000 of Fixed Costs Will Be Eliminated by Dropping

question 104

Multiple Choice

Michael's Hats,Inc.has two product lines-batting helmets and football helmets.The income statement data for the most recent year is as follows: $$\begin{array} { | l | r | r | r | } \hline & { \text { Total } } & \text { Batting Helmets } & \text { Football Helmets } \\\hline \text { Sales revenue } & \$ 1,100,000 & \$ 700,000 & \$ 400,000 \\\hline \text { Variable costs } & ( 480,000 & \underline { ( 200,000 ) } & ( 280,000 ) \\\hline \text { Contribution margin } & \$ 620,000 & \$ 500,000 & \$ 120,000 \\\hline \text { Fixed costs } & ( 220,000 ) & ( 70,000 ) & ( 150,000 ) \\\hline \text { Operating income (loss) } & \$ 400,000 & \$ 430,000 & \$ ( 30,000 ) \\\hline\end{array}$$ If $90,000 of fixed costs will be eliminated by dropping the football helmets line,how will dropping football helmets affect operating income of the company?

• A) Operating income will increase by $90,000.
• B) Operating income will increase by $120,000.
• C) Operating income will decrease by $150,000.
• D) Operating income will decrease by $30,000.

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Definitions:

Pensions

Retirement plans funded either by employers or governments, providing income to individuals upon retirement.

GAAP

Generally Accepted Accounting Principles; the standard framework of guidelines for financial accounting used in any given jurisdiction, particularly in the United States.

Projected Benefit Obligation

The present value of estimated future payments required to settle the obligations of a pension plan over its employees' expected future service.

Plan Assets

Assets that are held by a retirement plan from which the benefits to the participants are to be paid.