Question

​Protector, 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 $ 1 comma 040 comma 000 $ 700 comma 000 $ 340 comma 000 Variable costs ​(440 comma 000​) ​(150 comma 000​) ​(290 comma 000​) Contribution margin $ 600 comma 000 $ 550 comma 000 $ 50 comma 000 Fixed costs ​(160 comma 000​) ​(70 comma 000​) ​(90 comma 000​) Operating income​ (loss) $ 440 comma 000 $ 480 comma 000 ​$(40 comma 000​) Assuming the football helmets line is​ dropped, total fixed costs remain​ unchanged, and the space formerly used to produce the line is rented for $ 120 comma 000 per​ year, how will operating income be​ affected? A. Operating income will decrease by $ 50 comma 000. B. Operating income will increase by $ 70 comma 000. C. Operating income will increase by $ 50 comma 000. D. Operating income will decrease by $ 70 comma 000.

Answer 1

Answer :

Present situation

Particulars	Batting Helmets	Foot Ball Helmets	Total
Sales Reveune	$700,000	$340,000	$1,040,000
Less : Variable Cost	$150,000	$290,000	$440,000
Contribution Margin	$550,000	$50,000	$600,000
Fixed Costs	$70,000	$90,000	$160,000
Operating Income (Loss)	$480,000	($40,000)	$440,000

If football helmet line is dropped :

Particulars	Batting Helmets	Rental Income	Total
Sales Reveune	$700,000	$120,000	$820,000
Less : Variable Cost	$150,000	-	$150,000
Contribution Margin	$550,000	$120,000	$670,000
Less: Fixed Costs			$160,000
Operating Income (Loss)		$510,000

increase in  operating income =$510,000-$440,000=$70,000

So operating income increase by $70,000

So Answer is B. Operating income will increase by $ 70 comma 000.