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				$	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?

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