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				$	480,000
Variable expenses:
Variable manufacturing expenses	$	127,000
Sales commissions		52,000
Shipping		12,000
Total variable expenses					191,000
Contribution margin					289,000
Fixed expenses:
Advertising (for the bilge pump product line)		22,000
Depreciation of equipment (no resale value)		113,000
General factory overhead		42,000	*
Salary of product-line manager		119,000
Insurance on inventories		14,000
Purchasing department		58,000	†
Total fixed expenses					368,000
Net operating loss				$	(79,000	)

*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

Note :

• By discontinuing the bilge pump product line , the current contribution earned by bilge pump will be Lost .
• There will a saving in avoidable fixed cost if discontinuing the bilge pump product line The avaidable costs are - Advertising ,  Salary of product-line manager, Insurance on inventories.
• Depreciation of equipment is not a avaidable cost .

Computation of financial advantage (disadvantage) of discontinuing the bilge pump product line

Particulars	Amount ($)	Amount ($)
Loss of Contribution margin		(289,000)
Less : Saving in Fixed costs
Advertising	22,000
Salary of product-line manager	119,000
Insurance on inventories.	14,000	155,000
Financial advantage (disadvantage)		($134,000)

Thus if bilge pump product line will be discontine , there will be a financial disadvantage of $134,000