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				$	850,000
Variable expenses:
Variable manufacturing expenses	$	330,000
Sales commissions		42,000
Shipping		18,000
Total variable expenses					390,000
Contribution margin					460,000
Fixed expenses:
Advertising		270,000
Depreciation of equipment (no resale value)		80,000
General factory overhead		105,000	*
Salary of product-line manager		32,000
Insurance on inventories		8,000
Purchasing department		45,000	†
Total fixed expenses					540,000
Net operating loss				$	(80,000	)

*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:

a. Compute the increase or decrease of net operating income if the product line is continued or discontinued. (Decreases should be indicated by a minus sign.)

b. Would you recommend that the bilge pump product line be discontinued?

	Yes
	No

Answer 1

a. The computation of increase or decrease of net operation income is shown below:-

Here are some formulas from which we can determine the values:

Contribution margin = Sales - Total variable expenses

Net Operating loss = Contribution margin - Total fixed expenses

b. No, as net income will decrease by $150,000