The condensed income statement for a Fletcher Inc.for the past year is 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 Fletcher Inc.for the past year is 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

We need to find the change in net income after discontinuing Product G. 
From the income statement, we see that the contribution margin for Product G is $60,000 ($100,000 - $40,000). If we discontinue Product G, we will lose this contribution margin. 
Therefore, the net income will decrease by $30,000 ($60,000 x 0.5) since the company has a contribution margin ratio of 50% ($430,000 ÷ $860,000). 
Hence, the correct answer is (D) $30,000 Decrease.

The Condensed Income Statement for a Fletcher Inc