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				$	470,000
Variable expenses:
Variable manufacturing expenses	$	127,000
Sales commissions		48,000
Shipping		13,000
Total variable expenses					188,000
Contribution margin					282,000
Fixed expenses:
Advertising (for the bilge pump product line)		21,000
Depreciation of equipment (no resale value)		118,000
General factory overhead		47,000	*
Salary of product-line manager		129,000
Insurance on inventories		6,000
Purchasing department		55,000	†
Total fixed expenses					376,000
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

Answer- The financial (disadvantage) of discontinuing the bilge pump product line = ($126000).

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	470000	0	-470000
Less- Variable Expenses
Variable manufacturing expenses	127000	0	127000
Sales commissions	48000	0	48000
Shipping	13000	0	13000
Total variable expenses	188000	0	188000
Contribution margin	282000	0	-282000
Less- Fixed Expenses
Advertising	21000	0	21000
Depreciation of equipment	118000	118000	0
General factory overhead	47000	47000	0
Salary of product line manager	129000	0	129000
Insurance on inventories	6000	0	6000
Purchasing department	55000	55000	0
Total fixed expenses	376000	220000	156000
Net operating Income (loss)	-94000	-220000	-126000