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				$	460,000
Variable expenses:
Variable manufacturing expenses	$	132,000
Sales commissions		49,000
Shipping		20,000
Total variable expenses					201,000
Contribution margin					259,000
Fixed expenses:
Advertising (for the bilge pump product line)		28,000
Depreciation of equipment (no resale value)		101,000
General factory overhead		50,000	*
Salary of product-line manager		121,000
Insurance on inventories		6,000
Purchasing department		60,000	†
Total fixed expenses					366,000
Net operating loss				$	(107,000	)

*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?

Answer 1

What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

There is financial disadvantage of $3000 in discontinuing the bilge pump product line

our decision is based on the calculation made in the table given below

Reason for financial disadvantage

As per the calculation given in the following table it is very much clear that discontinuing the product line will result in extra loss of $3000 as loss from continuing the product is $107000 and loss from discontinuing the product line is $110000 it is because discontinuing the product will result in elimination of all sale, variable expense and fixed expenses except General Factory Overhead and Purchasing Department cost which amounts to $110000($60000+$50000) because as per instructions given in the question it is clearly said that overall general factory overhead and purchasing department cost will remain unaffected

As continuing the product gives contribution and which helps in recovery of the fixed cost and discontinuing the product will stop that contribution and fixed cost to the tune of $110000 will remain to be recovered and will result in loss to the tune of $110000

Following is the comparison if the bilge pump product line is continued or if the bilge pump product line is discontinued.

	IF NOT DISCONTINUED		IF DISCONTINUED
Sales		$     460,000		$                     -
Variable expenses:
Variable manufacturing expenses	$     132,000		$                 -	$                     -
Sales commissions	$      49,000		$                 -	$                     -
Shipping	$      20,000		$                 -	$                     -
Total variable expenses		$     201,000		$                     -
Contribution margin		$     259,000		$                     -
Fixed expenses:
Advertising (for the bilge pump product line)	$      28,000		$                 -	$                     -
Depreciation of equipment (no resale value)	$     101,000		$                 -	$                     -
General factory overhead	$      50,000		$       50,000	$            50,000
Salary of product-line manager	$     121,000		$                 -	$                     -
Insurance on inventories	$        6,000		$                 -	$                     -
Purchasing department	$      60,000		$       60,000	$            60,000
Total fixed expenses		$     366,000		$          110,000
Net operating loss		(107,000		$       (110,000)

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