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:

*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 $ 480,000 Variable expenses: Variable manufacturing expenses $ 127,000 Sales commissions 52,000 Shipping 12,000 Total variable expenses 191,000 Contribution margin 289,000 Fixed expenses: Advertising (for the bilge pump product line) 22,000 Depreciation of equipment (no resale value) 113,000 General factory overhead 42,000 * Salary of product-line manager 119,000 Insurance on inventories 14,000 Purchasing department 58,000 † Total fixed expenses 368,000 Net operating loss $ (79,000 )

Explanation / Answer

Note :

Computation of financial advantage (disadvantage) of discontinuing the bilge pump product line

Thus if bilge pump product line will be discontine , there will be a financial disadvantage of $134,000

Particulars Amount ($) Amount ($) Loss of Contribution margin (289,000) Less : Saving in Fixed costs Advertising 22,000 Salary of product-line manager 119,000 Insurance on inventories. 14,000 155,000 Financial advantage (disadvantage) ($134,000)

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