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				$	460,000
Variable expenses:
Variable manufacturing expenses	$	120,000
Sales commissions		51,000
Shipping		24,000
Total variable expenses					195,000
Contribution margin					265,000
Fixed expenses:
Advertising (for the bilge pump product line)		24,000
Depreciation of equipment (no resale value)		113,000
General factory overhead		39,000	*
Salary of product-line manager		122,000
Insurance on inventories		11,000
Purchasing department		47,000	†
Total fixed expenses					356,000
Net operating loss				$	(91,000	)

*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

Note :

• If bilge pump product line is discontinued , there will be a loss of contibution that can be earn from operations of bilge pump.
• Fixed costs except depreciation , general factory overhead & purchasing department will be result in saving in costs if  bilge pump product line is discontinued.
• The company will continue to bear the fixed cost of  depreciation , general factory overhead & purchasing department even if bilge pump is droped.

Answer

Loss of contribution margin : $265,000

Total saving in fixed costs = Advertising + Salary of product-line manager + Insurance on inventories

= $24,000 + $122,000 + $11,000 =$157,000

Financial advantage (disadvantage) of discontinuing the bilge pump product line

= Total saving in fixed costs - Loss of contribution margin

= $157,000 - $265,000 = ($108,000)

Thus there will a financial disadvantage of $108,000 if bilge pump product line is discontinued