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 $ 128,000 Sales commissions 42,000 Shipping 17,000 Total variable expenses 187,000 Contribution margin 223,000 Fixed expenses: Advertising (for the bilge pump product line) 21,000 Depreciation of equipment (no resale value) 116,000 General factory overhead 35,000 * Salary of product-line manager 126,000 Insurance on inventories 8,000 Purchasing department 40,000 † Total fixed expenses 346,000 Net operating loss $ (123,000 )

Explanation / Answer

If we drop the line the expenses which will be still incurring are below:
Depreciation of equipment=116000
Genral factory overhead=35000
Purchasing department=40000
Total cost=191000
Net operating income before drop=-123000
after drop line=-191000
the net financial disadvantage is 68000

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