The condensed income statement for a business for the past year is as follows:
Product: white, black
Sales
white: $ 750,000
black: $550,000
Less variable costs
white: 400,000
black: 380,000
Contribution margin
white: $350,000
black: $170,000
Less fixed costs
white: 240,000
black: 100,000
Income (loss) from operations
white: $110,000
black: $ 70,000
Management is considering the discontinuance of the manufacture and sale of black 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 white. What is the amount of change in net income for the current year that will result from the discontinuance of black?
Select one:
a. $40,000 decrease
b. $180,000 decrease
c. $70,000 decrease
d. $170,000 decrease
Can not assume that net income will decrease by the income of black. This is because black takes a portion of the fixed costs which, when black is discontinued, will decrease the net income.
So my guess is $170,000 decrease: fixed cost plus income lost.
Is this reasoning correct?
Yes, your reasoning is correct. If the company discontinues the production and sale of black, it would lose the contribution margin of $170,000 from black, which helps cover the total fixed costs. Since the fixed costs are not going to decrease, the net income will decrease by the same amount as the contribution margin of black. So the correct answer is d. $170,000 decrease.
No, your reasoning is not correct. To determine the change in net income resulting from the discontinuance of the black product, you need to consider the contribution margin and fixed costs associated with the black product.
The contribution margin for the black product is $170,000. This represents the amount of revenue that remains after deducting variable costs.
However, since the black product is being discontinued, the contribution margin for black will no longer contribute to net income. This means that the $170,000 contribution margin for black will be lost.
Therefore, the correct answer is option b. $180,000 decrease. This includes the loss of the black contribution margin ($170,000) plus the black income from operations ($70,000).
Yes, your reasoning is correct. To determine the amount of change in net income from discontinuing the black product, we need to consider the fixed costs associated with the black product and the income (loss) from operations for the black product.
From the given information, we can see that the fixed costs for the black product are $100,000 and the income from operations for the black product is $70,000.
When the black product is discontinued, the fixed costs associated with it, which are $100,000, will no longer be incurred. As a result, the net income will increase by $100,000.
However, we also need to consider that the income from operations for the black product, which is $70,000, will be lost. So, the net income will decrease by $70,000 due to the discontinuation of the black product.
Therefore, the total change in net income resulting from discontinuing the black product is the net increase in fixed costs ($100,000) minus the income lost from operations ($70,000), which is equal to $30,000.
Hence, the correct answer is not listed in the options provided. The amount of change in net income would be a $30,000 decrease.