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 Thalassines Kataskeves, S.A. Income Statement-Bilge Pump For the Quarter Ended March 31 430,000 Sales Variable expenses: Variable manufacturing expenses Sales commissions 133,000 54,000 14,000 Shipping Total variable expenses Contribution margin Fixed expenses: 201,000 229,000 Advertising (for the bilge pump product line) 22,000 109,000 32,000 120,000 5,000 57,0001t Depreciation of equipment (no resale value) General factory overhead Salary of product-line manager Insurance on inventories Purchasing department 345,000 (116,000) Total fixed expenses Net operating loss *Common costs allocated on the basis of machine-hours tCommon 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?

Explanation / Answer

Cost analysis

* Depreciation on equipment is not relavent because it has no resale value.

* General factory overhead and purchasing department is irrelavent as they are common costs allocated and they would be redistributed to other product lines if the product is discontinued.

Financial disadvantage of discontinuing the bilge product line = 82,000

Contribution margin lost (229,000) Savings from avoidable fixed costs : Advertising 22,000 Salary of product line manager 120,000 Insurance on inventories 5,000 Net loss from discontinuing the bilge product line (82,000)

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