The condensed income statement for a business 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?

Question

The condensed income statement for a business 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?

Quizplus · Accepted Answer

To calculate the change in net income that will result from the discontinuance of Product T, we need to determine the contribution margin for Product T and subtract it from the total contribution margin. The contribution margin represents the amount by which sales revenue exceeds variable costs.

From the income statement, we can calculate the contribution margin for Product T as follows:

Contribution margin = Sales revenue - Variable costs
Contribution margin = $1,000,000 - ($300,000 + $400,000)
Contribution margin = $300,000

The total contribution margin for both products is:

Total contribution margin = $2,500,000 - ($700,000 + $900,000)
Total contribution margin = $900,000

If Product T is discontinued, the contribution margin will decrease by $300,000, resulting in a decrease in net income. Therefore, the correct answer is D) $120,000 decrease.

The Condensed Income Statement for a Business for the Past