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				$	410,000
Variable expenses:
Variable manufacturing expenses	$	137,000
Sales commissions		44,000
Shipping		11,000
Total variable expenses					192,000
Contribution margin					218,000
Fixed expenses:
Advertising (for the bilge pump product line)		29,000
Depreciation of equipment (no resale value)		106,000
General factory overhead		32,000	*
Salary of product-line manager		125,000
Insurance on inventories		8,000
Purchasing department		43,000	†
Total fixed expenses					343,000
Net operating loss				$	(125,000	)

*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 = $(56000).

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	410000	0	-410000
Less- Variable Expesnes
Variable manufacturing expenses	137000	0	137000
Sales commissions	44000	0	44000
Shipping	11000	0	11000
Total variable expenses	192000	0	192000
Contribution margin	218000	0	-218000
Less- Fixed Expesnes
Advertising	29000	0	29000
Depreciation of equipment	106000	106000	0
General factory overhead	32000	32000	0
Salary of product line manager	125000	0	125000
Insurance on inventories	8000	0	8000
Purchasing department	43000	43000	0
Total fixed expenses	343000	181000	162000
Net operating Income (loss)	-125000	-181000	-56000