Question

Exercise 12-15 Dropping or Retaining a Segment [LO12-2]

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				$	430,000
Variable expenses:
Variable manufacturing expenses	$	137,000
Sales commissions		53,000
Shipping		15,000
Total variable expenses					205,000
Contribution margin					225,000
Fixed expenses:
Advertising (for the bilge pump product line)		29,000
Depreciation of equipment (no resale value)		113,000
General factory overhead		30,000	*
Salary of product-line manager		119,000
Insurance on inventories		5,000
Purchasing department		49,000	†
Total fixed expenses					345,000
Net operating loss				$	(120,000	)

*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	430000	0	-430000
Variable expenses:
Variable manufacturing expenses	137000	0	137000
Sales commissions	53000	0	53000
Shipping	15000	0	15000
Total variable expenses	205000	0	205000
Contribution margin	225000	0	-225000
Fixed expenses:
Advertising	29000	0	29000
Depreciation of equipment	113000	113000	0
General factory overhead	30000	30000	0
Salary of product line manager	119000	0	119000
Insurance on inventories	5000	0	5000
Purchasing department	49000	49000	0
Total fixed expenses	345000	192000	153000
Net operating Income (loss)	-120000	-192000	-72000
Financial (disadvantage) (72000)