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Exercise 10-15 Dropping or Retaining a Segment [LO10-2] Thalassines Kataskeves, S.A., of Greece makes marine equipment....

Exercise 10-15 Dropping or Retaining a Segment [LO10-2]

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 $ 430,000
  Variable expenses:
       Variable manufacturing expenses $ 136,000
       Sales commissions 47,000
       Shipping 14,000
  Total variable expenses 197,000
  Contribution margin 233,000
  Fixed expenses:
       Advertising 27,000
       Depreciation of equipment (no resale value) 104,000
       General factory overhead 42,000 *
       Salary of product-line manager 123,000
       Insurance on inventories 6,000
       Purchasing department 49,000
  Total fixed expenses 351,000
  Net operating loss $ (118,000 )
*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.)


     

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

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