Question

Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its...

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 $ 850,000
Variable expenses:
Variable manufacturing expenses $ 330,000
Sales commissions 42,000
Shipping 18,000
Total variable expenses 390,000
Contribution margin 460,000
Fixed expenses:
Advertising (for the bilge pump product line) 270,000
Depreciation of equipment (no resale value) 80,000
General factory overhead 105,000 *
Salary of product-line manager 32,000
Insurance on inventories 8,000
Purchasing department 45,000
Total fixed expenses 540,000
Net operating loss $ (80,000 )

*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?

Finacial (disadvantage)

Homework Answers

Answer #1
Keep Product Line Drop Product Line Difference:Net Operating
Sales 850000 0 -850000
Variable expenses:
Variable manufacturing expenses 330000 330000 330000
Sales commissions 42000 42000 42000
Shipping 18000 18000 18000
Total variable expenses 390000 390000 390000
Contribution margin 460000 -390000 -460000
Fixed expenses:
Advertising 270000 0 270000
Depreciation of equipment 80000 80000 0
General factory overhead 105000 105000 0
Salary of product line manager 32000 0 32000
Insurance on inventories 8000 0 8000
Purchasing department 45000 45000 0
Total fixed expenses 540000 230000 310000
Net operating Income (loss) -80000 -620000 -150000
Finacial (disadvantage) $(150000)
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