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 $ 470,000 Variable expenses: Variable manufacturing expenses $ 124,000 Sales commissions 40,000 Shipping 11,000 Total variable expenses 175,000 Contribution margin 295,000 Fixed expenses: Advertising (for the bilge pump product line) 30,000 Depreciation of equipment (no resale value) 116,000 General factory overhead 32,000 * Salary of product-line manager 125,000 Insurance on inventories 8,000 Purchasing department 51,000 † Total fixed expenses 362,000 Net operating loss $ (67,000 )

Explanation / Answer

The Loss was increased when we discontinue the product line and therefore, the financial disadvantage is -$ 71,000.

Particulars Keep Product Line Drop Product Line Difference: Net Operating Income Increase or (Decrease) Sales 470000 0 -470000 Variable expenses: Variable manufacturing expenses 124000 0 124000 Sales commissions 40000 0 40000 Shipping 21000 0 21000 Total variable expenses 185000 0 185000 Contribution margin 285000 0 -285000 Fixed expenses: Advertising 30000 0 30000 Depreciation of equipment 80000 80000 0 General factory overhead 32000 32000 0 Salary of product linemanager 125000 0 125000 Insurance on inventories 8000 0 8000 Purchasing department 51000 0 51000 Total fixed expenses 326000 112000 214000 Net operating Income (loss) -41000 -112000 -499000

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