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 (for the bilge pump product line)		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:

What is the financial advantage (disadvantage) of discontinuing the bilge pump product line?

Answer 1

Solution:

Incremental Analysis - Continue or discontinue blige pump product line
Particulars	Continue Blige - Keep Product Line (Alt 1)	Discontinue Blige Pump - Drop Product Line (Alt2)	Financial advantage (Disadvantage) (Alt 2)
Sales	$850,000.00	$0.00	-$850,000.00
Variable Expenses:
Variable manufacturing expenses	$330,000.00	$0.00	-$330,000.00
Sales commissions	$42,000.00	$0.00	-$42,000.00
Shipping	$18,000.00	$0.00	-$18,000.00
Total Variable expenses	$390,000.00	$0.00	-$390,000.00
Contribution Margin	$460,000.00	$0.00	-$460,000.00
Fixed Expenses:
Advertising Traceable	$270,000.00	$0.00	-$270,000.00
Depreciation of equipment	$80,000.00	$80,000.00	$0.00
General factory overhead	$105,000.00	$105,000.00	$0.00
Salaries of Product line manager	$32,000.00	$0.00	-$32,000.00
Insurance on inventories	$8,000.00	$0.00	-$8,000.00
Purchasing department	$45,000.00	$45,000.00	$0.00
Total Fixed expenses	$540,000.00	$230,000.00	-$310,000.00
Net Income	-$80,000.00	-$230,000.00	-$150,000.00