Question

halassines 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				$	470,000
Variable expenses:
Variable manufacturing expenses	$	135,000
Sales commissions		54,000
Shipping		23,000
Total variable expenses					212,000
Contribution margin					258,000
Fixed expenses:
Advertising (for the bilge pump product line)		27,000
Depreciation of equipment (no resale value)		114,000
General factory overhead		37,000	*
Salary of product-line manager		110,000
Insurance on inventories		6,000
Purchasing department		58,000	†
Total fixed expenses					352,000
Net operating loss				$	(94,000	)

*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

	Keep Product	Drop Product Line	Difference:
	Line		Net Operating
			Income Increase
			or (Decrease)
Sales	470,000	0	-470,000
Variable expenses:
Variable manufacturing expenses	135000	0	135000
Sales commissions	54000	0	54000
Shipping	23000	0	23000
Total variable expenses	212000	0	212000
Contribution margin	258,000	0	-258,000
Fixed expenses:
Advertising	27000	0	27000
Depreciation of equipment	114000	114000	0
General factory overhead	37000	37000	0
Salary of product line manager	110,000	0	110000
Insurance on inventories	6000	0	6000
Purchasing department	58000	58000	0
Total fixed expenses	352000	209000	143000
Net Disadvantage of dropping the line	-94,000	-209,000	-115,000

Financial Disadvantage of discontinuing the bilge pump product line =$115,000