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				$	440,000
Variable expenses:
Variable manufacturing expenses	$	128,000
Sales commissions		53,000
Shipping		24,000
Total variable expenses					205,000
Contribution margin					235,000
Fixed expenses:
Advertising (for the bilge pump product line)		29,000
Depreciation of equipment (no resale value)		106,000
General factory overhead		44,000	*
Salary of product-line manager		117,000
Insurance on inventories		13,000
Purchasing department		50,000	†
Total fixed expenses					359,000
Net operating loss				$	(124,000	)

*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	440000	0	-440000
Variable expenses:
Variable manufacturing expenses	128000	0	128000
Sales commissions	53000	0	53000
Shipping	24000	0	24000
Total variable expenses	205000	0	205000
Contribution margin	235000	0	-235000
Fixed expenses:
Advertising	29000	0	29000
Depreciation of equipment	106000	106000	0
General factory overhead	44000	44000	0
Salary of product line manager	117000	0	117000
Insurance on inventories	13000	0	13000
Purchasing department	50000	50000	0
Total fixed expenses	359000	200000	159000
Net operating Income (loss)	-124000	-200000	-76000
Financial (disadvantage) (76000)