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

Assumption:

1. The product manager is managing on this product line.

2. The given insurance amount is for insuring this product line only.

By Discontinuing the business the management will be able to increase the total profit of the company up to $279,000 because it can avoid the following expenses as I explain Below.

But there will be a reduction in the net income from other product lines because the portion of other fixed expenses like general factory overhead and purchase department expenses currently charged against bilg pump product line will be charged against the remaining products which will reduce the net income from all other product lines by an amount of $ 83,000 As follows.

So the final effect will be as follows

Conclusion:

By discontinuing the product line company will get an increase in the total net operating income of $196,000

Fixed Expense $ Advertisement (As it is only used for this particular production company can avoid the cost in future   30,000 Salary of product line manager (as there is no more production no need of a product line manager in for this product line) 125,000

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