Question

The condensed income statement for a Hayden Corp. for the past year is as follows: Product T U Sales $680,000 $320,000 Costs: Variable costs $540,000 $ 220,000 Fixed costs 145,000 40,000 Total costs $685,000 $260,000 Income (loss) $ (5,000) $ 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 result from the discontinuance of Product T? a. $140,000 decrease b. $5,000 increase c. $140,000 increase d. $5,000 decrease

Answer 1

Answer:

a. $140,000 decrease

Explanation:

$\left[\begin{array}{cccc}Year&continued&discontinued&differential\\Sales&680,000&0&-680,000\\variable \: cost&-540,000&0&540,000\\contibution&140,000&0&-140,000\\fixed \: cost&-145,000&-145,000&0\\net \: income&-5,000&-145,000&-140,000\\\end{array}\right]$

The fixed cost would not be eliminated entirely and we have no information of any partial decrease. so the differential analysis shows a decrease in 140,000 in the net income if product T is discountinued