Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has
ID: 2545143 • Letter: T
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 $ 460,000 Variable expenses: Variable manufacturing expenses $ 132,000 Sales commissions 52,000 Shipping 19,000 Total variable expenses 203,000 Contribution margin 257,000 Fixed expenses: Advertising (for the bilge pump product line) 27,000 Depreciation of equipment (no resale value) 120,000 General factory overhead 34,000 * Salary of product-line manager 113,000 Insurance on inventories 8,000 Purchasing department 51,000 † Total fixed expenses 353,000 Net operating loss $ (96,000 )
Explanation / Answer
Depreciation, general factory overhead, and purchasing department are unavoidable costs; therefore, irrelevant for decision making. These costs should not be considered.
If these are removed the new fixed cost becomes,
New fixed cost = Earlier fixed cost – Depreciation – General factory overhead – Purchasing department
= 353,000 – 120,000 – 34,000 – 51,000
= $148,000
Net operating income = Contribution margin – New fixed cost
= 257,000 – 148,000
= $109,000
Since there is income but no loss, discontinuing the product line would give disadvantage. Such disadvantage is the loss of income of $109,000.
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