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 $ 400,000 Variable expenses: Variable manufacturing expenses $ 130,000 Sales commissions 43,000 Shipping 16,000 Total variable expenses 189,000 Contribution margin 211,000 Fixed expenses: Advertising (for the bilge pump product line) 30,000 Depreciation of equipment (no resale value) 107,000 General factory overhead 45,000 * Salary of product-line manager 116,000 Insurance on inventories 8,000 Purchasing department 48,000 † Total fixed expenses 354,000 Net operating loss $ (143,000 ) *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

Ans:-

Computation of the increase or decrease of net operating income if the bilge pump product line are continued or discontinued:

Particulars	Keep product line ($)	Drop product line ($)	Difference: ($) Net operating income increase or (decrease)
Sales	400,000	0	(400,000)
Variable expenses:
variable manufacturing expenses	130,000	0	130,000
sales commissions	43,000	0	43,000
shipping	16,000	0	16,000
Total variable expenses	189,000	0	189,000
Contribution margin	211,000	0	(211,000)
Fixed expenses:
advertising	30,000	0	30,000
depreciation of equipment	107,000	107,000	0
general factory overhead	45,000	45,000	0
salary of product line manager	116,000	0	116,000
insurance on inventories	8,000	0	8,000
purchasing department	48,000	48,000	0
Total fixed expenses	354,000	200,000	154,000
Net operating income (loss)	(143,000)	(200,000)	(57,000)

Advise: The bilge pump product line should not be discontinued.