Exercise 12-15 Dropping or Retaining a Segment [L012-2) Thalassines Kataskeves,

Question

Exercise 12-15 Dropping or Retaining a Segment [L012-2) 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 Variable expenses: 420,000 Variable manufacturing expenses Sales commissions 135,000 50,000 Shipping Total variable expenses Contribution margin Fixed expenses: 215, 000 Advertising (for the bilge pump product line) 28,000 Depreciation of equipment (no resale value) 103,000 33,000 7,000 58,000 General factory overhead Salary of product-1line manager Insurance on inventories 120,00 Purchasing department 349,000 $(134,000) Total fixed expenses Net operating loss Common costs allocated on the basis of machine-hours. tCommon 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?

Explanation / Answer

Keep Product Line Drop Product Line Difference Sales 420000 0 -420000 Variable expenses: Variable manufacturing expenses 135000 0 135000 Sales commissions 50000 0 50000 Shipping 20000 0 20000 Total variable expenses 205000 0 205000 Contribution margin 215000 0 -215000 Fixed expenses: Advertising 28000 0 28000 Depreciation of equipment 103000 103000 0 General factory overhead 33000 33000 0 Salary of product line manager 120000 0 120000 Insurance on inventories 7000 0 7000 Purchasing department 58000 58000 0 Total fixed expenses 349000 194000 155000 Net operating Income (loss) -134000 -194000 -60000 Financial (disadvantage) ($60000)

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