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:

     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.

Compute the increase or decrease of net operating income if the product line is continued or discontinued. (Decreases should be indicated by a minus sign.)

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:

Explanation / Answer

a. Computation of net operating income Continue Discontinue Contribution Margin 271000 271000 Less: Fixed costs        Advertising-Avoidable if product-line is discontinued. 25000 0        Depreciation of equipment (no resale value) -Hence not avoidable 104000 104000        General factory overhead- common costs-only allocated -anyway will be incurred 43000 43000        Salary of product-line manager- will not be incurred if product-line is discontinued 112000 0        Insurance on inventories- Will not be incurred- no sales- no inventory 13000 0        Purchasing department- common costs-only allocated -anyway will be incurred 49000 49000 Net Operating income -75000 75000 NOI increases by 150000 (-75000 to +75000) when product line is discontinued. bThe bilge pump product line can be discontinued.

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