Question

Exercise 12-15 Dropping or Retaining a Segment [LO12-2] Thalassines Kataskeves, S.A., of Greece makes marine equipment....

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 $ 490,000
Variable expenses:
Variable manufacturing expenses $ 121,000
Sales commissions 50,000
Shipping 10,000
Total variable expenses 181,000
Contribution margin 309,000
Fixed expenses:
Advertising (for the bilge pump product line) 26,000
Depreciation of equipment (no resale value) 113,000
General factory overhead 38,000 *
Salary of product-line manager 120,000
Insurance on inventories 10,000
Purchasing department 59,000
Total fixed expenses 366,000
Net operating loss $ (57,000 )

*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?

Homework Answers

Answer #1
Keep Product Line Drop Product Line Difference:Net Operating Income Increase or (Decrease)
Sales 490000 0 -490000
Variable expenses:
Variable manufacturing expenses 121000 0 121000
Sales commissions 50000 0 50000
Shipping 10000 0 10000
Total variable expenses 181000 0 181000
Contribution margin 309000 0 -309000
Fixed expenses:
Advertising 26000 0 26000
Depreciation of equipment 113000 113000 0
General factory overhead 38000 38000 0
Salary of product line manager 120000 0 120000
Insurance on inventories 10000 0 10000
Purchasing department 59000 59000 0
Total fixed expenses 366000 210000 156000
Net operating Income (loss) -57000 -210000 -153000
Financial (disadvantage) $(153000)
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