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?

Finacial (disadvantage)

Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31 Sales $ 850,000 Variable expenses: Variable manufacturing expenses $ 330,000 Sales commissions 42,000 Shipping 18,000 Total variable expenses 390,000 Contribution margin 460,000 Fixed expenses: Advertising (for the bilge pump product line) 270,000 Depreciation of equipment (no resale value) 80,000 General factory overhead 105,000 * Salary of product-line manager 32,000 Insurance on inventories 8,000 Purchasing department 45,000 † Total fixed expenses 540,000 Net operating loss $ (80,000 )

Explanation / Answer

Keep Product Line Drop Product Line Difference:Net Operating Sales 850000 0 -850000 Variable expenses: Variable manufacturing expenses 330000 330000 330000 Sales commissions 42000 42000 42000 Shipping 18000 18000 18000 Total variable expenses 390000 390000 390000 Contribution margin 460000 -390000 -460000 Fixed expenses: Advertising 270000 0 270000 Depreciation of equipment 80000 80000 0 General factory overhead 105000 105000 0 Salary of product line manager 32000 0 32000 Insurance on inventories 8000 0 8000 Purchasing department 45000 45000 0 Total fixed expenses 540000 230000 310000 Net operating Income (loss) -80000 -620000 -150000 Finacial (disadvantage) $(150000)

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