halassines Kataskeves, S.A., of Greece makes marine equipment. The company has b
ID: 2410084 • Letter: H
Question
halassines 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:
*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?
Thalassines Kataskeves, S.A.Income Statement—Bilge Pump
For the Quarter Ended March 31 Sales $ 470,000 Variable expenses: Variable manufacturing expenses $ 135,000 Sales commissions 54,000 Shipping 23,000 Total variable expenses 212,000 Contribution margin 258,000 Fixed expenses: Advertising (for the bilge pump product line) 27,000 Depreciation of equipment (no resale value) 114,000 General factory overhead 37,000 * Salary of product-line manager 110,000 Insurance on inventories 6,000 Purchasing department 58,000 † Total fixed expenses 352,000 Net operating loss $ (94,000 )
Explanation / Answer
Answer:
Keep Product
Drop Product Line
Difference:
Line
Net Operating
Income Increase
or (Decrease)
Sales
470,000
0
-470,000
Variable expenses:
Variable manufacturing expenses
135000
0
135000
Sales commissions
54000
0
54000
Shipping
23000
0
23000
Total variable expenses
212000
0
212000
Contribution margin
258,000
0
-258,000
Fixed expenses:
Advertising
27000
0
27000
Depreciation of equipment
114000
114000
0
General factory overhead
37000
37000
0
Salary of product line manager
110,000
0
110000
Insurance on inventories
6000
0
6000
Purchasing department
58000
58000
0
Total fixed expenses
352000
209000
143000
Net Disadvantage of dropping the line
-94,000
-209,000
-115,000
Financial Disadvantage of discontinuing the bilge pump product line =$115,000
Keep Product
Drop Product Line
Difference:
Line
Net Operating
Income Increase
or (Decrease)
Sales
470,000
0
-470,000
Variable expenses:
Variable manufacturing expenses
135000
0
135000
Sales commissions
54000
0
54000
Shipping
23000
0
23000
Total variable expenses
212000
0
212000
Contribution margin
258,000
0
-258,000
Fixed expenses:
Advertising
27000
0
27000
Depreciation of equipment
114000
114000
0
General factory overhead
37000
37000
0
Salary of product line manager
110,000
0
110000
Insurance on inventories
6000
0
6000
Purchasing department
58000
58000
0
Total fixed expenses
352000
209000
143000
Net Disadvantage of dropping the line
-94,000
-209,000
-115,000
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