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 $ 490,000 Variable expenses: Variable manufacturing expenses $ 124,000 Sales commissions 51,000 Shipping 21,000 Total variable expenses 196,000 Contribution margin 294,000 Fixed expenses: Advertising (for the bilge pump product line) 23,000 Depreciation of equipment (no resale value) 105,000 General factory overhead 31,000 * Salary of product-line manager 116,000 Insurance on inventories 12,000 Purchasing department 45,000 † Total fixed expenses 332,000 Net operating loss $ (38,000 ) *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 = $(143000).

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	490000	0	-490000
Less- Variable Expesnes
Variable manufacturing expenses	124000	0	124000
Sales commissions	51000	0	51000
Shipping	21000	0	21000
Total variable expenses	196000	0	196000
Contribution margin	294000	0	-294000
Less- Fixed Expesnes
Advertising	23000	0	23000
Depreciation of equipment	105000	105000	0
General factory overhead	31000	31000	0
Salary of product line manager	116000	0	116000
Insurance on inventories	12000	0	12000
Purchasing department	45000	45000	0
Total fixed expenses	332000	181000	151000
Net operating Income (loss)	-38000	-181000	-143000