Question

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows: Thalassines Kataskeves, S.A. Income Statement—Bilge Pump For the Quarter Ended March 31 Sales $ 410,000 Variable expenses: Variable manufacturing expenses $ 129,000 Sales commissions 42,000 Shipping 10,000 Total variable expenses 181,000 Contribution margin 229,000 Fixed expenses: Advertising (for the bilge pump product line) 25,000 Depreciation of equipment (no resale value) 104,000 General factory overhead 45,000 * Salary of product-line manager 110,000 Insurance on inventories 6,000 Purchasing department 50,000 † Total fixed expenses 340,000 Net operating loss $ (111,000 ) *Common costs allocated on the basis of machine-hours. †Common costs allocated on the basis of sales dollars. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company’s total general factory overhead or total Purchasing Department expenses. Required: What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

Answer 1

	Keep Product Line	Drop Product Line	Difference:Net Operating Income Increase or (Decrease)
Sales	410000	0	-410000
Variable expenses:
Variable manufacturing expenses	129000	0	129000
Sales commissions	42000	0	42000
Shipping	10000	0	10000
Total variable expenses	181000	0	181000
Contribution margin	229000	0	-229000
Fixed expenses:
Advertising	25000	0	25000
Depreciation of equipment	104000	104000	0
General factory overhead	45000	45000	0
Salary of product line manager	110000	0	110000
Insurance on inventories	6000	0	6000
Purchasing department	50000	50000	0
Total fixed expenses	340000	199000	141000
Net operating Income (loss)	-111000	-199000	-88000
Financial (disadvantage) (88000)