Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has
ID: 2534224 • Letter: T
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 $ 460,000 Variable expenses: Variable manufacturing expenses $ 120,000 Sales commissions 51,000 Shipping 24,000 Total variable expenses 195,000 Contribution margin 265,000 Fixed expenses: Advertising (for the bilge pump product line) 24,000 Depreciation of equipment (no resale value) 113,000 General factory overhead 39,000 * Salary of product-line manager 122,000 Insurance on inventories 11,000 Purchasing department 47,000 † Total fixed expenses 356,000 Net operating loss $ (91,000 )
Explanation / Answer
Note :
Answer
Loss of contribution margin : $265,000
Total saving in fixed costs = Advertising + Salary of product-line manager + Insurance on inventories
= $24,000 + $122,000 + $11,000 =$157,000
Financial advantage (disadvantage) of discontinuing the bilge pump product line
= Total saving in fixed costs - Loss of contribution margin
= $157,000 - $265,000 = ($108,000)
Thus there will a financial disadvantage of $108,000 if bilge pump product line is discontinued
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