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				$	440,000
Variable expenses:
Variable manufacturing expenses	$	133,000
Sales commissions		41,000
Shipping		23,000
Total variable expenses					197,000
Contribution margin					243,000
Fixed expenses:
Advertising		29,000
Depreciation of equipment (no resale value)		116,000
General factory overhead		49,000	*
Salary of product-line manager		113,000
Insurance on inventories		9,000
Purchasing department		47,000	†
Total fixed expenses					363,000
Net operating loss				$	(120,000	)

*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.) Thalassines Kataskeves, S.A. Income Statement—Bilge Pump For the Quarter Ended March 31 Keep Product Line Drop Product Line Difference: Net Operating Income Increase or (Decrease) Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses

b.	Would you recommend that the bilge pump product line be discontinued?
	No Yes

Answer 1

A)

Following assumptions are taken for solving this problem

• The cost of general fixed overhead expenses will remain same even if product line is kept or product line is dropped
• The cost of purchasing department expenses will remain same even if product line is kept or product line is dropped
• The cost of depreciation expenses of equipment   will remain even if product line is kept or product line is dropped

the increase or decrease of net operating income if the product line is continued or discontinued is calculated below

Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31
	Keep Product Line	Drop Product Line	Difference: Net Operating Income Increase or (Decrease)
Sales	$        440,000	$0	-$440,000
Variable expenses:
Variable manufacturing expenses	$        133,000	$0	$133,000
Sales commissions	$          41,000	$0	$41,000
Shipping	$         23,000	$0	$23,000
Total variable expenses	$        197,000	$0	$197,000
Contribution margin	$        243,000	0	-$243,000
Fixed expenses:
Advertising	$29,000	$0	$29,000
Depreciation of equipment (no resale value)	$116,000	$116,000	$0
General factory overhead	$49,000	$49,000	$0
Salary of product-line manager	$113,000	$0	$113,000
Insurance on inventories	$9,000	$0	$9,000
Purchasing department	$47,000	$47,000	$0
Total fixed expenses	$363,000	$212,000	$151,000
Net operating loss	-120000	-212000	-92000

B ) Would you recommend that the bilge pump product line be discontinued?

Ans

The net operating loss decreases to $92,000 if the bilge pump product line is discontinued . if it is continued then the net operating loss is at $120,000

There will be saving of $28,000 if the bilge pump product line be discontinued and hence is recommended