The condensed income statement for a Hayden Corp.for the past year is as follows: Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year.The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U.What is the amount of change in net income for the current year that will result from the discontinuance of Product T?
A)$140,000 increase
B)$5,000 increase
C)$5,000 decrease
D)$140,000 decrease

Question

The condensed income statement for a Hayden Corp.for the past year is as follows:  Management is considering the discontinuance of the manufacture and sale of Product T at the beginning of the current year.The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Product U.What is the amount of change in net income for the current year that will result from the discontinuance of Product T?
A)$140,000 increase 
B)$5,000 increase 
C)$5,000 decrease 
D)$140,000 decrease

Quizplus · Accepted Answer

The contribution margin for Product T is $10, and the fixed expenses allocated to Product T are $150,000 per year. Therefore, discontinuing the production of Product T would result in a decrease in contribution margin of $150,000 ($10 x 15,000 units). This decrease would result in a decrease in net income of the same amount, as there would no longer be any offsetting fixed expenses. Hence, the net income would decrease by $140,000 ($150,000 decrease in contribution margin minus the $10,000 in variable expenses saved by eliminating Product T). Therefore, the correct answer is (D), $140,000 decrease.

The Condensed Income Statement for a Hayden Corp