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?
A) $120,000 increase
B) $250,000 increase
C) $25,000 decrease
D) $120,000 decrease

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?
A) $120,000 increase 
B) $250,000 increase 
C) $25,000 decrease 
D) $120,000 decrease

Quizplus · Accepted Answer

From the condensed income statement, we can see that Product T generated a revenue of $500,000 and had variable expenses of $250,000. Therefore, the contribution margin for Product T is $250,000.

If Product T is discontinued, the total revenue will decrease by $500,000, but there will be no change in the fixed expenses or the sales of Product U. Therefore, the total contribution margin will decrease by $250,000.

Since the contribution margin is a direct offset to fixed expenses and net income is calculated as (contribution margin - fixed expenses), the net income for the current year will decrease by $120,000 (i.e. the contribution margin lost from discontinuing Product T).

Therefore, the answer is D - $120,000 decrease.

The Condensed Income Statement for a Business for the Past