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				$	420,000
Variable expenses:
Variable manufacturing expenses	$	132,000
Sales commissions		43,000
Shipping		21,000
Total variable expenses					196,000
Contribution margin					224,000
Fixed expenses:
Advertising (for the bilge pump product line)		25,000
Depreciation of equipment (no resale value)		115,000
General factory overhead		32,000	*
Salary of product-line manager		118,000
Insurance on inventories		11,000
Purchasing department		49,000	†
Total fixed expenses					350,000
Net operating loss				$	(126,000	)

*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

Cost Analysis

Contribution margin lost	(224,000)
Savings from avoidable fixed costs :
Advertising	25,000
Salary of product line manager	118,000
Insurance on inventories	11,000
Net loss from dropping the product line	(70,000)

* Depreciation is not avoidable as there is no resale value

* General factory overhead is not avoidable as they are allocated costs.

* Purchasing departemt is not avoidable as they are allocated costs.

The financial disadvantage of discontinuing the bilge pump product line - 70,000