The condensed income statement for a business for the past year is presented as follows:
Management is considering the discontinuance of the manufacture and sale of Product G 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 Products F and H.What is the amount of change in net income for the current year that will result from the discontinuance of Product G?
A)$10,000 increase
B)$20,000 increase
C)$10,000 decrease
D)$20,000 decrease

Question

The condensed income statement for a business for the past year is presented as follows: 
Management is considering the discontinuance of the manufacture and sale of Product G 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 Products F and H.What is the amount of change in net income for the current year that will result from the discontinuance of Product G?
A)$10,000 increase 
B)$20,000 increase 
C)$10,000 decrease 
D)$20,000 decrease

Quizplus · Accepted Answer

To calculate the change in net income, we need to find the contribution margin of Product G, which is its sales revenue minus its variable costs.

Contribution margin for Product G = $150,000 - $90,000 = $60,000

Since discontinuing Product G would not affect the sales of Products F and H, the total sales revenue and variable costs would remain the same.

Therefore, the change in net income would be equal to the contribution margin of Product G, which is $60,000, but in the opposite direction because we are discontinuing the product.

Hence, the change in net income would be a decrease of $20,000 (Option D).

The Condensed Income Statement for a Business for the Past