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				$	450,000
Variable expenses:
Variable manufacturing expenses	$	123,000
Sales commissions		51,000
Shipping		13,000
Total variable expenses					187,000
Contribution margin					263,000
Fixed expenses:
Advertising (for the bilge pump product line)		22,000
Depreciation of equipment (no resale value)		105,000
General factory overhead		31,000	*
Salary of product-line manager		118,000
Insurance on inventories		6,000
Purchasing department		42,000	†
Total fixed expenses					324,000
Net operating loss				$	(61,000	)

*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

Answer- The financial (disadvantage) of discontinuing the bilge pump product line = $(117000).

Explanation-

Thalassines Kataskeves, S.A.
Computation of increase or decrease of net operating income if the product line is continued or discontinued
Particulars	Keep Product Line	Drop Product Line	Difference Net Operating Income Increase or Decrease
	$	$	$
Sales	450000	0	-450000
Less- Variable Expesnes
Variable manufacturing expenses	123000	0	123000
Sales commissions	51000	0	51000
Shipping	13000	0	13000
Total variable expenses	187000	0	187000
Contribution margin	263000	0	-263000
Less- Fixed Expesnes
Advertising	22000	0	22000
Depreciation of equipment	105000	105000	0
General factory overhead	31000	31000	0
Salary of product line manager	118000	0	118000
Insurance on inventories	6000	0	6000
Purchasing department	42000	42000	0
Total fixed expenses	324000	178000	146000
Net operating Income (loss)	-61000	-178000	-117000