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 Variable expenses $470,000 Variable manufacturing expenses Sales commissions Shipping $122,000 47,000 23,000 Total variable expenses 192,000 278,000 Contribution margin Fixed expenses Advertising Depreciation of equipment (no resale value) General factory overhead Salary of product-line manager Insurance on inventories Purchasing department 25,000 109,000 43,000* 112,000 5,000 44,000t Total fixed expenses 338,000 Net operating loss $(60,000) *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

Explanation / Answer

Ans. THALASSINES KATASKEVES, S.A. Income Statement - Blige Pump For the Quarter Ended March 31 Particulars Keep Product line Drop Product line Diff. Net income (Inc./Dec.) Sales 470000 0 -470000 Variable expenses: Variable manufacturing expenses 122000 0 122000 Sales commissions 47000 0 47000 Shipping 23000 0 23000 Total variable expenses 192000 0 192000 Contribution margin 278000 0 -278000 Fixed expenses: Advertising 25000 25000 Depreciation of equipment 109000 109000 0 General factory overhead 43000 43000 0 Salary of product line manager 112000 0 112000 Insurance on inventories 5000 0 5000 Purchasing department 44000 44000 0 Total fixed expenses 338000 196000 142000 Net Operating Income (loss) -60000 -196000 -136000 *Discontinuing of product line would not affect sales as well as variable expenses. *Fixed expenses related factory (Depreciation & general overhead) & purchasing department expenses are not affect so theses expenses still remain the same. *Sales, Contribution margin & net operating income will decrease by discontinuing of product line. *If the sales become 0 due to drop product line the net operating income will decrease & If the Variable (and affected fixed expenses) expenses become 0 it will increase the net income. On the other hand if non-affected fixed expenses remains constant it will make the net income Zero.

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