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) $20,000 increase
B) $30,000 increase
C) $20,000 decrease
D) $30,000 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) $20,000 increase 
B) $30,000 increase 
C) $20,000 decrease 
D) $30,000 decrease

Quizplus · Accepted Answer

From the income statement, we can see that Product G had sales of $100,000 and variable expenses of $60,000, resulting in a contribution margin of $40,000. If the product is discontinued, the sales and variable expenses associated with Product G will both be eliminated. Therefore, the net income will decrease by $20,000 ($40,000 contribution margin - $20,000 fixed expenses allocated to Product G). Hence, the correct answer is C.

The Condensed Income Statement for a Business for the Past