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	$	138,000
Sales commissions		52,000
Shipping		16,000
Total variable expenses					206,000
Contribution margin					294,000
Fixed expenses:
Advertising (for the bilge pump product line)		25,000
Depreciation of equipment (no resale value)		111,000
General factory overhead		31,000	*
Salary of product-line manager		122,000
Insurance on inventories		5,000
Purchasing department		46,000	†
Total fixed expenses					340,000
Net operating loss				$	(46,000	)

*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

In case product line is discontinued,There will be no revenue ,no variable expense and thus no contribution margin.

Since fixed cost remains constant and will be incurred whether product line is continued or not ,it is irrelevant to decision making .However any fixed cost avoidable if product line is discontinued is relevant to decision making .

DIFFERENTIAL ANALYSIS
	Continue [1]	Discontinue[2]	Advantage /(disadvantage) from discontinuance of product line [2-1]
Revenue	500000	0	-500000
less:variable expense	-206000	0	206000
Contribution margin	294000	0	-294000
less:Fixed expense
Advertising (for the bilge pump product line)	25000	0	25000
Depreciation of equipment (no resale value)	111000	111000	0
General factory overhead	31000	31000	0
Salary of product-line manager	122000	0	122000
Insurance on inventories	5000	0	5000
Purchasing department	46000	46000	0
Total fixed expenses	-340000	-188000	152000
Net operating loss	-46000	-188000	-142000

There is a financial disadvantage of $ 142000 from discontinuance of Bilge Pump product line .

working:

salary of product manager,advertising cost and Insurance cost will be avoided if product line is discontinued. Depreciation of equipment will be continued even if product line is discontinued since asset has no resale value .