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				$	490,000
Variable expenses:
Variable manufacturing expenses	$	134,000
Sales commissions		53,000
Shipping		16,000
Total variable expenses					203,000
Contribution margin					287,000
Fixed expenses:
Advertising (for the bilge pump product line)		29,000
Depreciation of equipment (no resale value)		103,000
General factory overhead		34,000	*
Salary of product-line manager		123,000
Insurance on inventories		11,000
Purchasing department		46,000	†
Total fixed expenses					346,000
Net operating loss				$	(59,000	)

*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

Financial disadvantage = $ 124,000

Calculations:

If the product is continued, loss = $ 59,000

If the product is discontinued, loss = $ 183,000*

Financial disadvantage = $ 124,000

Thalassines Kataskeves, S.A.
Sales		$             -
Variable expenses:
Variable manufacturing expenses	$            -
Sales commissions	$            -
Shipping	$            -
Total variable expenses		$             -
Contribution margin		$             -
Fixed expenses:
Advertising	$            -
Depreciation	$ 103,000
General factory overhead	$   34,000
Salary of product-line manager	$            -
Insurance on inventories	$            -
Purchasing department	$   46,000
Total fixed expenses		$ 183,000
Net operating loss		$(183,000)

In case of any doubt, please comment.