The condensed income statement for a Hayden Corp. for the past year is as follow

Question

The condensed income statement for a Hayden Corp. for the past year is as follows: Product $680.000 $320.000 Variable costs Fixed costs Total costs Income (loss) S540,000 145.000 $685.000 $(5 000) $220,000 40.000 $260.000 $60,000 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 from the discontinuance of Product T? Oa, $5,000 increase Ob. $140,000 decrease result

Explanation / Answer

Option B is the answer

We can calculate these type of problems very easily.

Net income decrease = Contribution margin of discontinued product

If the company discontinues a particular division, contribution margin of that division becomes 0 but fixed fixed costs remain same.

That implies total net income decrease for the company = contribution margin of the discontinued division.

For this problem, contribution margin of Product T = Sales - variable cost = 680,000-540,000 =140,000

So if the company discontinues product T, we don't have any revenue from that division and we have to pay fixed costs for that division. That means total net income decreases by contribution margin lost.

(Please let me know if you face any issues or if you need a long tabular method to solve this)

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