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				$	420,000
Variable expenses:
Variable manufacturing expenses	$	131,000
Sales commissions		53,000
Shipping		24,000
Total variable expenses					208,000
Contribution margin					212,000
Fixed expenses:
Advertising		27,000
Depreciation of equipment (no resale value)		104,000
General factory overhead		46,000	*
Salary of product-line manager		129,000
Insurance on inventories		13,000
Purchasing department		53,000	†
Total fixed expenses					372,000
Net operating loss				$	(160,000	)

*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:

a. Compute the increase or decrease of net operating income if the product line is continued or discontinued. (Decreases should be indicated by a minus sign.)

b. Would you recommend that the bilge pump product line be discontinued?

	Yes
	No

Answer 1

Answer- a)-

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	420000	0	-420000
Less- Variable Expenses
Variable manufacturing expenses	131000	0	131000
Sales commissions	53000	0	53000
Shipping	24000	0	24000
Total variable expenses	208000	0	208000
Contribution margin	212000	0	-212000
Less- Fixed Expenses
Advertising	27000	0	27000
Depreciation of equipment	104000	104000	0
General factory overhead	46000	46000	0
Salary of product line manager	129000	0	129000
Insurance on inventories	13000	0	13000
Purchasing department	53000	53000	0
Total fixed expenses	372000	203000	169000
Net operating Income (loss)	-160000	-203000	-43000

b)-Bilge pump product line should not be discontinued.