Thalassines Kataskeves, S.A, of Greece makes marine equipment. The company has b

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 expensess Variable manufacturing expenses Sales commissions shipping $124,000 44,000 23,000 23191,000 Total variable expenses 239,000 Contribution margin Pixed expenses ndvertising (for the bilge pump product 1ine) Depreciation of equipment (no resale value) General factory overhead salary of product-line manager 21,000 115,000 48,000 128,000 7,000 47,000 Insurance on inventories Purchasing department Total fixed expenses Net operating loss 366,000 $(127,000) 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 for decision making as it has no resale value

* General factory overhead is not relavent for decision making as the decision has no effect on general factoty overhead.

* Purchasing department is not relavent for decision making as the decision has no effect on Purchasing department expenses.

Lost contribution margin (239,000) Savings from avoidable fixed cots : Advertising 21,000 Salary of product-line manager 128,000 Insurance on inventories 7,000 Net loss from dropping the product line (83,000)

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