Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has

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 $ 500,000 Variable expenses: Variable manufacturing expenses $ 126,000 Sales commissions 48,000 Shipping 14,000 Total variable expenses 188,000 Contribution margin 312,000 Fixed expenses: Advertising (for the bilge pump product line) 26,000 Depreciation of equipment (no resale value) 105,000 General factory overhead 48,000 * Salary of product-line manager 128,000 Insurance on inventories 7,000 Purchasing department 48,000 † Total fixed expenses 362,000 Net operating loss $ (50,000 ) *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? I NEED IT ASAP

Explanation / Answer

The financial advantage (disadvantage) of discontinuing the bilge pump product line is (201000)

Keep product line drop product line difference net operating income increase / (decrease) Sales 500,000 0 (500000) Variable expenses: Variable manufacturing expenses 126,000 0 126000 Sales commissions 48,000 0 48000 Shipping 14,000 0 14000 Total variable expenses 188,000 0 188000 Contribution margin 312,000 0 (312000) Fixed expenses: Advertising 26,000 0 26000 Depreciation of equipment 105,000 105000 0 General factory overhead 48,000 48000 0 Salary of product-line manager 128,000 0 128000 Insurance on inventories 7,000 0 7000 Purchasing department 48,000 48000 0 Total fixed expenses 362,000 201000 161000 Net operating income (50,000) (201000) (151000)

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