Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has
ID: 2444486 • 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:
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.
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.)
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:
Explanation / Answer
Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31
(Amount in $)
Keep Product Line
Drop Product Line
Difference :
Net Operating Income
Increase or (Decrease)
Sales
450,000
-
-450,000
Variable expenses:
Variable manufacturing expenses
137,000
-
137,000
Sales Commission
55,000
-
55,000
Shipping
25,000
-
25,000
Total Variable Exp
217,000
-
217,000
Contribution margin
233,000
-
233,000
Fixed expenses:
Advertising
30,000
-
30,000
Depreciation of equipment (no resale value)
104,000
-
104,000
General factory overhead
43,000
43,000
-
Salary of product-line manager
118,000
-
118,000
Insurance on inventories
11,000
-
11,000
Purchasing department
44,000
44,000
Total Fixed Expenses
350,000
87,000
263,000
Net operating loss
(117,000)
(87,000)
30,000
From the above solution it is clear that in case we drop the product line then there will be saving of $ 30,000. So the product line should be dropped.
Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31
(Amount in $)
Keep Product Line
Drop Product Line
Difference :
Net Operating Income
Increase or (Decrease)
Sales
450,000
-
-450,000
Variable expenses:
Variable manufacturing expenses
137,000
-
137,000
Sales Commission
55,000
-
55,000
Shipping
25,000
-
25,000
Total Variable Exp
217,000
-
217,000
Contribution margin
233,000
-
233,000
Fixed expenses:
Advertising
30,000
-
30,000
Depreciation of equipment (no resale value)
104,000
-
104,000
General factory overhead
43,000
43,000
-
Salary of product-line manager
118,000
-
118,000
Insurance on inventories
11,000
-
11,000
Purchasing department
44,000
44,000
Total Fixed Expenses
350,000
87,000
263,000
Net operating loss
(117,000)
(87,000)
30,000
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