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				$	460,000
Variable expenses:
Variable manufacturing expenses	$	133,000
Sales commissions		45,000
Shipping		13,000
Total variable expenses					191,000
Contribution margin					269,000
Fixed expenses:
Advertising (for the bilge pump product line)		21,000
Depreciation of equipment (no resale value)		117,000
General factory overhead		44,000	*
Salary of product-line manager		117,000
Insurance on inventories		7,000
Purchasing department		41,000	†
Total fixed expenses					347,000
Net operating loss				$	(78,000	)

*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 is= ($124000).

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	460000	0	-460000
Less- Variable Expenses
Variable manufacturing expenses	133000	0	133000
Sales commissions	45000	0	45000
Shipping	13000	0	13000
Total variable expenses	191000	0	191000
Contribution margin	269000	0	-269000
Less- Fixed Expenses
Advertising	21000	0	21000
Depreciation of equipment	117000	117000	0
General factory overhead	44000	44000	0
Salary of product line manager	117000	0	117000
Insurance on inventories	7000	0	7000
Purchasing department	41000	41000	0
Total fixed expenses	347000	202000	145000
Net operating Income (loss)	-78000	-202000	-124000