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?

Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31 Sales $ 440,000 Variable expenses: Variable manufacturing expenses $ 137,000 Sales commissions 54,000 Shipping 16,000 Total variable expenses 207,000 Contribution margin 233,000 Fixed expenses: Advertising (for the bilge pump product line) 23,000 Depreciation of equipment (no resale value) 103,000 General factory overhead 44,000 * Salary of product-line manager 130,000 Insurance on inventories 9,000 Purchasing department 49,000 † Total fixed expenses 358,000 Net operating loss $ (125,000 )

Explanation / Answer

* Depreciation of equipment (no resale value), General factory overhead, Purchasing department are not avoidable fixed costs associated with the product line.

Lost contribution margin from discontinuing the bilge pump product line (233,000) Savings from avoidable fixed costs : Advertising 23,000 Salary of product line manager 130,000 Insurance on inventories 9,000 Net loss from discontinuing the bilge pump product line 71,000

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