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				$	420,000
Variable expenses:
Variable manufacturing expenses	$	123,000
Sales commissions		53,000
Shipping		22,000
Total variable expenses					198,000
Contribution margin					222,000
Fixed expenses:
Advertising		30,000
Depreciation of equipment (no resale value)		104,000
General factory overhead		34,000	*
Salary of product-line manager		119,000
Insurance on inventories		14,000
Purchasing department		46,000	†
Total fixed expenses					347,000
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
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.)

     

Answer 1

Answer
Income Statement
	Keep Product	Drop Product	Difference
	Line	Line	Net operating income
			Increase/decrease
Sales	$ 4,20,000	0	$   -4,20,000
Variable expenses :
Variable manufacturing expenses	$ 1,23,000	0	$    1,23,000
Sales commissions	$    53,000	0	$       53,000
Shipping	$    22,000	0	$       22,000
Total variable cost	$ 1,98,000		$    1,98,000
Fixed Costs :
Advertising	$    30,000	0	$       30,000
Depriciation of equipment	$ 1,04,000	$ 1,04,000	0
General factory overhead	$    34,000	$     34,000	0
Salary of product line manager	$ 1,19,000	0	$    1,19,000
Insurance on inventories	$    14,000	0	$       14,000
Purchasing department	$    46,000	$     46,000	0
Total fixed costs	$ 3,47,000	$ 1,84,000	$    1,63,000
Net Income	$-1,25,000	$ -1,84,000	$      -59,000
Hence by dropping the product line , the cost will increase by $59000
The cost that will be incurred even if the product line is discontinue is the sunk cost
and will have to be incurred and absobed by other product lines
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