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

Question

2 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: 50 points Thalassines Kataskeves, S.A Income Statement-Bilge Pump For the Quarter Ended March 31 Sales Variable expenses: S 470,000 Variable manufacturing expenses Sales commissions Shipping 127,000 53,000 18,000 eBook Total variable expenses Contribution margin Fixed expenses: 198,000 272,000 Advertising (for the bilge pump product line) 24,000 118,000 Print Depreciation of equipment (no resale value) General factory overhead 38,000* 115,000 Salary of product-line manager Insurance on inventories 8,000 41,000t References Purchasing department 344,000 $ (72,000) Total fixed expenses Net operating loss 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. Required What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

Explanation / Answer

financial advantage (disadvantage):

income income increase or decrease on discontinuation sales 470000 (470000) variable expense: variable manufacturing expense 127000 127000 sales commission 53000 53000 shipping 18000 18000 total variable expense 198000 198000 contribution margin 272000 (272000) fixed expense: advertising 24000 24000 depreciation of equipment 118000 0 (discontuning has no effect on depreciation) general factory overhead 38000 0 (discontuning has no effect on general factory overhead) salary of product line manager 115000 115000 insurance on inventories 8000 8000 purchasing department 41000 0 (discontuning has no effect on purchasing department) total fixed expense 344000 147000 net income (72000) (125000)

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