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 $ 500,000 Variable expenses: Variable manufacturing expenses $ 128,000 Sales commissions 52,000 Shipping 19,000 Total variable expenses 199,000 Contribution margin 301,000 Fixed expenses: Advertising (for the bilge pump product line) 23,000 Depreciation of equipment (no resale value) 120,000 General factory overhead 42,000 * Salary of product-line manager 127,000 Insurance on inventories 10,000 Purchasing department 59,000 † Total fixed expenses 381,000 Net operating loss $ (80,000 )

Explanation / Answer

BASED ON THE ABOVE CALCULATION IT IS BETTER TO DIVE OFF THE PRODUCT LINE.

CALCULATION OF FINANCIAL ADVANTAGE PARTICULARS AMOUNT $ CONTRIBUTION LOSS 301,000 EXPENDITURE SAVED ADVERTSING COST 23,000 SALARY OF PRODUCT LINE MANAGER 127,000 INSURANCE ON INVENTORIES 10,000 NET LOSS IF PRODUCT LINE DISPOSED 141,000

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