The condensed income statement for a business for the past year is as follows: ​

Question

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?

Answer 1

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.