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				$	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?

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)