halassines Kataskeves, S.A., of Greece makes marine equipment. The company has b
ID: 2528933 • Letter: H
Question
halassines 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 $ 440,000 Variable expenses: Variable manufacturing expenses $ 129,000 Sales commissions 44,000 Shipping 16,000 Total variable expenses 189,000 Contribution margin 251,000 Fixed expenses: Advertising (for the bilge pump product line) 24,000 Depreciation of equipment (no resale value) 106,000 General factory overhead 42,000 * Salary of product-line manager 118,000 Insurance on inventories 10,000 Purchasing department 54,000 † Total fixed expenses 354,000 Net operating loss $ (103,000 )
Explanation / Answer
Keep Product Line Drop Product Line Difference: Sales 440000 0 -440000 Variable expenses: Variable manufacturing expenses 129000 0 129000 Sales commissions 44000 0 44000 Shipping 16000 0 16000 Total variable expenses 189000 0 189000 Contribution margin 251000 0 -251000 Fixed expenses: Advertising 24000 0 24000 Depreciation of equipment 106000 106000 0 General factory overhead 42000 42000 0 Salary of product line manager 118000 0 118000 Insurance on inventories 10000 0 10000 Purchasing department 54000 54000 0 Total fixed expenses 354000 202000 152000 Net operating Income (loss) -103000 -202000 -99000 Financial (disadvantage) ($99000)
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