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				$	420,000
Variable expenses:
Variable manufacturing expenses	$	139,000
Sales commissions		45,000
Shipping		10,000
Total variable expenses					194,000
Contribution margin					226,000
Fixed expenses:
Advertising (for the bilge pump product line)		25,000
Depreciation of equipment (no resale value)		104,000
General factory overhead		39,000	*
Salary of product-line manager		117,000
Insurance on inventories		8,000
Purchasing department		58,000	†
Total fixed expenses					351,000
Net operating loss				$	(125,000	)

*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

Calculation of Operating income from bilge pump product line:

Sales		$420,000
Variable expenses:
Variable manufacturing expenses	139,000
Sales commissions	45,000
Shipping	10,000
Total variable expenses		194,000
Contribution margin		226,000
Avoidable Fixed Expenses:
Advertising (for the bilge pump product line)	25,000
Salary of product-line manager	117,000
Insurance on inventories	8,000
Total avoidable fixed expenses		150,000
Net Operating Income		76,000

Note: Common expenses will not change as a result of the decision and hence irrelevant

Note: Depreciation is sunk cost and hence irrelevant

financial advantage (disadvantage) of discontinuing the bilge pump product line = $(76,000)

i.e. disadvantage