Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has

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:

*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?

Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31 Sales $ 410,000 Variable expenses: Variable manufacturing expenses $ 136,000 Sales commissions 46,000 Shipping 11,000 Total variable expenses 193,000 Contribution margin 217,000 Fixed expenses: Advertising (for the bilge pump product line) 27,000 Depreciation of equipment (no resale value) 114,000 General factory overhead 45,000 * Salary of product-line manager 110,000 Insurance on inventories 15,000 Purchasing department 53,000 † Total fixed expenses 364,000 Net operating loss $ (147,000 )

Explanation / Answer

Keep ProductLine Drop Product Line Difference:Net Operating Income Increase or (Decrease) Sales 410000 0 -410000 Variable expenses: Variable manufacturing expenses 136000 0 136000 Sales commissions 46000 0 46000 Shipping 11000 0 11000 Total variable expenses 193000 0 193000 Contribution margin 217000 0 -217000 Fixed expenses: Advertising 27000 0 27000 Depreciation of equipment 114000 114000 0 General factory overhead 45000 45000 0 Salary of product line manager 110000 0 110000 Insurance on inventories 15000 0 15000 Purchasing department 53000 53000 0 Total fixed expenses 364000 212000 152000 Net operating Income (loss) -147000 -212000 -65000 Financial (disadvantage) ($65000)

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