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				$	480,000
Variable expenses:
Variable manufacturing expenses	$	131,000
Sales commissions		54,000
Shipping		19,000
Total variable expenses					204,000
Contribution margin					276,000
Fixed expenses:
Advertising (for the bilge pump product line)		26,000
Depreciation of equipment (no resale value)		100,000
General factory overhead		36,000	*
Salary of product-line manager		127,000
Insurance on inventories		12,000
Purchasing department		45,000	†
Total fixed expenses					346,000
Net operating loss				$	(70,000	)

*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

Solution

Financial Disadvantage

$ (111,000.00)

Working

Thalassines Kataskeves, S.A.
Statement showing Finantial Advantage or (Disadvantage) of Discontinuing a product line
Sales		$ 480,000
Variable expenses
Variable Manufacturing Expenses	$ 131,000
Sales Commission	$ 54,000
Shipping	$ 19,000	$ 204,000
Contribution		$ 276,000
Avoidable Fixed Expenses
Advertisement Expenses	$ 26,000
Salary of Product line Manager	$ 127,000
Insurance on Inventories	$ 12,000
Total Avoidable Fixed Cost		$ 165,000
Net Benefit of continuing or Net disadvantage of discontinuing		$ 111,000

.

Notes:
1) Unavoidable Fixed Cost will not be considered because they will occur even if no production is done.
2) Depreciation is not considered since equipment has zero salvage value and depreciation is a non cash expense.
3) Similarly General factory overheads and Purchasing department expenses will continue to occur at same level that is why they are also excluded from calculation