Shit like that annoys me, how people can make such a big deal out of a word. If he had meant it in an offensive way then fair enough, punish him in the same way you would if he'd called the kid a wanker. But the kid had probably muttered something like "Chill out, ni99a", so he responded in a similar fashion. Would it be the same if he'd said "Well sit down, negro"? Or is that allowed because it's a formal term for ethnicity?
Words are only offensive if they are said in an offensive manner.