Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has
ID: 2512245 • 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: Thalassines Kataskeves, S.A. Income Statement-Bilge Pump For the Quarter Ended March 31 Sales Variable expenses: $ 490,000 Variable manufacturing expenses Sales commissions Shipping $ 126,000 44,000 21,000 Total variable expenses Contribution margin Fixed expenses: 191,000 299,000 Advertising (for the bilge pump product line) Depreciation of equipment (no resale value) General factory overhead Salary of product-line manager Insurance on inventories Purchasing department 29,000 104,000 47,000 114,000 14,000 42,000t 350,000 $ (51,000) 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 expensesExplanation / Answer
Solution:
The question is related to decision making and determined the advantage or disadvantage of discontinuing a product line.
We can calculate the advantage or disadvantage based on the Relevant Cost. Relevant Cost is the cost which will incur in future and different in each alternative course of action.
The cost which are same under each alternative course of action is Irrelevant and does not play any role in decision making.
If company discontinues the line, company will lost sales and contribution margin but they may save some money by not incurring fixed expenses directly related to the product line.
Calculation of Advantage or (Disadvantage) from discontinuing bilge pump product line
Saving in Fixed Costs
Advertisement Expense
$29,000
Salary of Product Line Manager
$114,000
Insurance on Inventories
$14,000
Total Saving in Fixed Costs
$157,000
Less: Loss of Contribution Margin
($299,000)
Net advantage or (disadvantage)
($142,000)
Financial Disadvantage of discontinuing the bilge pump product line = $142,000
Note – Common costs are not considered since it will continue to incur in future also.
Depreciation of equipment (no resale value) – since it does not have resale value and does not involve any cash inflow or outflow.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Saving in Fixed Costs
Advertisement Expense
$29,000
Salary of Product Line Manager
$114,000
Insurance on Inventories
$14,000
Total Saving in Fixed Costs
$157,000
Less: Loss of Contribution Margin
($299,000)
Net advantage or (disadvantage)
($142,000)
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