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 $ 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?

Homework Answers

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)
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