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Sports Hats, Etc. has two product lines, Baseball helmets and Football helmets. Income statement...

Question:

Sports Hats, Etc. has two product lines, Baseball helmets and Football helmets. Income statement data for the most recent year follow:

Total Baseball Helmets Football Helmets
Sales Revenue $460,000 $310,000 $150,000
Variable Expenses 355,000 235,000 120,000
Contribution Margin 105,000 75,000 30,000
Fixed Expenses 76,000 38,000 38,000
Operating Income (Loss) $29,000 $37,000 $(8,000)

Should the company keep or drop Football Helmets? Give numerical justification for your answer.

Dropping a Product:

When a company is considering dropping a product it should not rely on the financial reports per product line to make the decision, but rather conduct a differential analysis because not all costs allocated to the product will be avoided when the product is dropped.

Answer and Explanation:


If the football helmets are dropped, the effect on operating income will be:

Loss in Sales Revenue $150,000
Saving in Variable Expenses 120,000
Loss in Contribution Margin $30,000
Saving inFixed Expenses
(Fixed expenses will not be avoided if the product is dropped)
0
Decrease in Operating Income $30,000



Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

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