Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has
ID: 2436425 • Letter: T
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 $ 130,000 Sales commissions 46,000 Shipping 14,000 Total variable expenses 190,000 Contribution margin 220,000 Fixed expenses: Advertising (for the bilge pump product line) 27,000 Depreciation of equipment (no resale value) 106,000 General factory overhead 44,000 * Salary of product-line manager 114,000 Insurance on inventories 8,000 Purchasing department 54,000 † Total fixed expenses 353,000 Net operating loss $ (133,000 )
Explanation / Answer
Cost analysis
* Depreciation on equipment is not an avoidable fixed cost as it has no resale value.
* General factory overhead and purchasing department costs are not avoidable fixed costs as they would be allocated to other products if the product line is discontinued.
Financial disadvantage of discontinuing the bilge product line = 71,000.
Lost contribution margin (220,000) Savings from avoided fixed costs : Advertising 27,000 Salary of product line manager 114,000 Insurance on inventories 8,000 Net loss from dropping the product line (71,000)Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.