Question

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its...

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 $ 450,000
Variable expenses:
Variable manufacturing expenses $ 129,000
Sales commissions 48,000
Shipping 23,000
Total variable expenses 200,000
Contribution margin 250,000
Fixed expenses:
Advertising (for the bilge pump product line) 23,000
Depreciation of equipment (no resale value) 115,000
General factory overhead 31,000 *
Salary of product-line manager 119,000
Insurance on inventories 9,000
Purchasing department 44,000
Total fixed expenses 341,000
Net operating loss $ (91,000 )

*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.

What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

Homework Answers

Answer #1
Calculation of financial advantage/disadvantage
Particular Keep pump product line drop pump product line difference
sale 450000 -450000
variable cost: 0
variable manufacturing exp 129000 129000
sale commission 48000 48000
shipping 23000 23000
total variable expenses 200000 0 200000
Contribution 250000 0 -250000
less: fixed expenses 0
advertising 23000 23000
depreciation 115000 115000 0
general Factory OH 31000 31000 0
Salary of product line manager 119000 119000
insurance on inventories 9000 9000
purchasing deptt 44000 44000 0
total fixed expenses 341000 190000 151000
net operating income/loss -91000 -190000 -99000
product line should not be discontinued
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