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 $ 137,000 Sales commissions 54,000 Shipping 11,000 Total variable expenses 202,000 Contribution margin 238,000 Fixed expenses: Advertising (for the bilge pump product line) 30,000 Depreciation of equipment (no resale value) 113,000 General factory overhead 48,000 * Salary of product-line manager 115,000 Insurance on inventories 13,000 Purchasing department 51,000 † Total fixed expenses 370,000 Net operating loss $ (132,000 ) *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

	Keep Product Line	Drop Product Line	Difference:Net Operating Income Increase or (Decrease)
Sales	$    440,000.00	$                             -	$ (440,000.00)
Variable Expense
Variable Manufacturing Expenses	$    137,000.00	$                             -	$    137,000.00
Sales Commissions	$      54,000.00	$                             -	$      54,000.00
Shipping	$      11,000.00	$                             -	$      11,000.00
Total Variable Expense	$    202,000.00	$                             -	$    202,000.00
Contribution Margin	$    238,000.00	$                             -	$ (238,000.00)
Fixed Expenses
Advertising	$      30,000.00		$      30,000.00
Depreciation of equipment	$    113,000.00	$            113,000.00	$                     -
General Factory Overhead	$      48,000.00	$              48,000.00	$                     -
Salary of product Line manager	$    115,000.00		$    115,000.00
Insurance on inventories	$      13,000.00		$      13,000.00
Purchasing Department	$      51,000.00	$              51,000.00	$                     -
Total Fixed Expenses	$    370,000.00	$            212,000.00	$    158,000.00
Net Operating Income	$ (132,000.00)	$         (212,000.00)	$    (80,000.00)