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	$	136,000
Sales commissions		46,000
Shipping		11,000
Total variable expenses					193,000
Contribution margin					217,000
Fixed expenses:
Advertising (for the bilge pump product line)		27,000
Depreciation of equipment (no resale value)		114,000
General factory overhead		45,000	*
Salary of product-line manager		110,000
Insurance on inventories		15,000
Purchasing department		53,000	†
Total fixed expenses					364,000
Net operating loss				$	(147,000	)

*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 ProductLine	Drop Product Line	Difference:Net Operating Income Increase or (Decrease)
Sales	410000	0	-410000
Variable expenses:
Variable manufacturing expenses	136000	0	136000
Sales commissions	46000	0	46000
Shipping	11000	0	11000
Total variable expenses	193000	0	193000
Contribution margin	217000	0	-217000
Fixed expenses:
Advertising	27000	0	27000
Depreciation of equipment	114000	114000	0
General factory overhead	45000	45000	0
Salary of product line manager	110000	0	110000
Insurance on inventories	15000	0	15000
Purchasing department	53000	53000	0
Total fixed expenses	364000	212000	152000
Net operating Income (loss)	-147000	-212000	-65000
Financial (disadvantage) ($65000)