Exercise 12-15 Dropping or Retaining a Segment [LO12-2] Thalassines Kataskeves,

Question

Exercise 12-15 Dropping or Retaining a Segment [LO12-2] 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 $ 490,000 Variable expenses: Variable manufacturing expenses $ 131,000 Sales commissions 54,000 Shipping 12,000 Total variable expenses 197,000 Contribution margin 293,000 Fixed expenses: Advertising (for the bilge pump product line) 25,000 Depreciation of equipment (no resale value) 119,000 General factory overhead 35,000 * Salary of product-line manager 122,000 Insurance on inventories 10,000 Purchasing department 54,000 † Total fixed expenses 365,000 Net operating loss $ (72,000 ) *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?

Explanation / Answer

The Net income earned from Bilge Pump Product Line: Sales revenue 490,000 Less: Variable cost 197,000 Contribution 293,000 Less: Avoidable fixed cost: Advertising 25,000 Salary of product line manager 122,000 Insurance in inventories 10,000 Incremental revenue of product line 136,000 note: General factory overhead, depreciation and purchasing department expense, will have to be incurred by the company, even on discontinue the product line. Therefore, these are irrelevant cost. As per above, company should not discontinue the product line, as it will lead to loss of revenue by $ 136,000

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