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				$	440,000
Variable expenses:
Variable manufacturing expenses	$	127,000
Sales commissions		45,000
Shipping		20,000
Total variable expenses					192,000
Contribution margin					248,000
Fixed expenses:
Advertising (for the bilge pump product line)		21,000
Depreciation of equipment (no resale value)		107,000
General factory overhead		47,000	*
Salary of product-line manager		122,000
Insurance on inventories		6,000
Purchasing department		50,000	†
Total fixed expenses					353,000
Net operating loss				$	(105,000	)

*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 = $ 204,000 (-) $ 105,000

= $ 99,000

Calculation:

Thalassines Kataskeves, S.A.
Sales		$             -
Variable expenses:
Variable manufacturing expenses	$           -
Sales commissions	$           -
Shipping	$           -
Total variable expenses		$             -
Contribution margin		$             -
Fixed expenses:
Advertising	$           -
Depreciation	$ 107,000
General factory overhead	$   47,000
Salary of product-line manager	$           -
Insurance on inventories	$           -
Purchasing department	$   50,000
Total fixed expenses		$ 204,000
Net operating loss		$(204,000)

Note:

If the product line is not removed, loss is $ 105,000;

If the product line is removed, the loss becomes $ 204,000.

So, the financial disadvantage will be:

= $ 204,000 (-) $ 105,000

= $ 99,000.

In case of any doubt, please feel free to comment.