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	$	124,000
Sales commissions		40,000
Shipping		12,000
Total variable expenses					176,000
Contribution margin					234,000
Fixed expenses:
Advertising (for the bilge pump product line)		28,000
Depreciation of equipment (no resale value)		111,000
General factory overhead		49,000	*
Salary of product-line manager		121,000
Insurance on inventories		11,000
Purchasing department		57,000	†
Total fixed expenses					377,000
Net operating loss				$	(143,000	)

*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?

Garrison 16e Rechecks 2017-11-14, Garrison 16e Rechecks 2018-01-13

Answer 1

Financial Advantage ( Disadvantage):

	Keep Product Line	Drop Product Line	Net Op. Income Increase ( Decrease)
Sales	$ 410,000	$0	-$ 410,000
Variable Expenses:
Variable Manuf. Expenses	$ 124,000	0	124,000
Sales commission	$40,000	0	40,000
Shipping	$12,000	0	12,000
Total Variable Expense	$ 176,000	0	176,000
Contribution Margin	$ 234,000	0	-234,000
Fixed Expenses:
Advertising	$ 28,000	0	$ 28,000
Depreciation on Equipment	$ 111,000	$ 111,000	$0
General factory overhead	$ 49,000	$ 49,000	$0
Salary of product line manager	$ 121,000	0	121,000
Insurance on inventories	$ 11,000	0	11,000
Purchasing Department	$ 57,000	$ 57,000	0
Total Fixed Expense	$ 377,000	$217000	$ 160,000
Net Operating Income ( Loss)	-$ 143,000	-$217,000	- $74,000

Financial Disadvantage:

Loss increases by $ 74,000