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				$	500,000
Variable expenses:
Variable manufacturing expenses	$	137,000
Sales commissions		42,000
Shipping		17,000
Total variable expenses					196,000
Contribution margin					304,000
Fixed expenses:
Advertising (for the bilge pump product line)		30,000
Depreciation of equipment (no resale value)		114,000
General factory overhead		32,000	*
Salary of product-line manager		125,000
Insurance on inventories		5,000
Purchasing department		48,000	†
Total fixed expenses					354,000
Net operating loss				$	(50,000	)

*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

Statement showing Financial Advantage or (Disadvantage) of Discontinuing a product line
Sales		$    5,00,000.00
Variable expenses
Variable Manufacturing Expenses	$ 1,37,000.00
Sales Commission	$     42,000.00
Shipping	$     17,000.00	$    1,96,000.00
Contribution		$    3,04,000.00
Avoidable Fixed Expenses
Advertisement Expenses	$     30,000.00
Salary of Product line Manager	$ 1,25,000.00
Insurance on Inventories	$        5,000.00
Total Avoidable Fixed Cost		$    1,60,000.00
Net Benefit		$    1,44,000.00

Financial Disadvantage on Discontinuing Bilge Pump Product Line would be $ 144000.

Financial Disadvantage

$     144,000

Notes:
1) Unavoidable Fixed Cost will not be considered because they will occur even if no production is done.
2) Depreciation is not considered since equipment has zero salvage value and depreciation is a non-cash expense.
3) Similarly General factory overheads and Purchasing department expenses will continue to occur at same level that is why they are also excluded from calculation