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				$	460,000
Variable expenses:
Variable manufacturing expenses	$	120,000
Sales commissions		50,000
Shipping		24,000
Total variable expenses					194,000
Contribution margin					266,000
Fixed expenses:
Advertising (for the bilge pump product line)		24,000
Depreciation of equipment (no resale value)		111,000
General factory overhead		43,000	*
Salary of product-line manager		126,000
Insurance on inventories		11,000
Purchasing department		46,000	†
Total fixed expenses					361,000
Net operating loss				$	(95,000	)

*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	460000	0	-460000
Variable expenses:
Variable manufacturing expenses	120000	0	120000
Sales commissions	50000	0	50000
Shipping	24000	0	24000
Total variable expenses	194000	0	194000
Contribution margin	266000	0	-266000
Fixed expenses:
Advertising	24000	0	24000
Depreciation of equipment	111000	111000	0
General factory overhead	43000	43000	0
Salary of product line manager	126000	0	126000
Insurance on inventories	11000	0	11000
Purchasing department	46000	46000	0
Total fixed expenses	361000	200000	161000
Net operating Income (loss)	-95000	-200000	-105000
Financial (disadvantage) $(105000)