Question

Exercise 12-15 Dropping or Retaining a Segment [LO12-2]

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	$	130,000
Sales commissions		50,000
Shipping		14,000
Total variable expenses					194,000
Contribution margin					256,000
Fixed expenses:
Advertising (for the bilge pump product line)		22,000
Depreciation of equipment (no resale value)		110,000
General factory overhead		50,000	*
Salary of product-line manager		111,000
Insurance on inventories		5,000
Purchasing department		59,000	†
Total fixed expenses					357,000
Net operating loss				$	(101,000	)

*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 = $(118000).

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	130000	0	130000
Sales commissions	50000	0	50000
Shipping	14000	0	14000
Total variable expenses	194000	0	194000
Contribution margin	256000	0	-256000
Less- Fixed Expesnes
Advertising	22000	0	22000
Depreciation of equipment	110000	110000	0
General factory overhead	50000	50000	0
Salary of product line manager	111000	0	111000
Insurance on inventories	5000	0	5000
Purchasing department	59000	59000	0
Total fixed expenses	357000	219000	138000
Net operating Income (loss)	-101000	-219000	-118000