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 $ 440,000 Variable expenses: Variable manufacturing expenses $ 130,000 Sales commissions 47,000 Shipping 11,000 Total variable expenses 188,000 Contribution margin 252,000 Fixed expenses: Advertising (for the bilge pump product line) 28,000 Depreciation of equipment (no resale value) 108,000 General factory overhead 38,000 * Salary of product-line manager 119,000 Insurance on inventories 11,000 Purchasing department 57,000 † Total fixed expenses 361,000 Net operating loss $ (109,000 ) *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

Discontinuing the Bilge Pump product line will result in financial disadvantages. If we ignore the permanent Fixed Cost of

(a) Depreciation of equipment (no resale value) $ 108,000, and

(b) General factory overhead $ 38,000,

                a total of $ 146,000, the Bilge Pump is giving a net profit of $ 37, 000, which is further reducing the permanent Fixed Cost/Net Operating Loss from $ 146,000 to $109,000.

Therefore, Thalassines Kataskeves, S.A. should continue the Bilge Pump product.

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