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 $ 480,000 Variable expenses: Variable manufacturing expenses $ 133,000 Sales commissions 55,000 Shipping 13,000 Total variable expenses 201,000 Contribution margin 279,000 Fixed expenses: Advertising (for the bilge pump product line) 25,000 Depreciation of equipment (no resale value) 104,000 General factory overhead 33,000 * Salary of product-line manager 127,000 Insurance on inventories 11,000 Purchasing department 52,000 † Total fixed expenses 352,000 Net operating loss $ (73,000 )

Explanation / Answer

Keep Product Line Drop Product Line Difference Sales 480000 0 -480000 Variable expenses: Variable manufacturing expenses 133000 0 133000 Sales commissions 55000 0 55000 Shipping 13000 0 13000 Total variable expenses 201000 0 201000 Contribution margin 279000 0 -279000 Fixed expenses: Advertising 25000 0 25000 Depreciation of equipment 104000 104000 0 General factory overhead 33000 33000 0 Salary of product line manager 127000 0 127000 Insurance on inventories 11000 0 11000 Purchasing department 52000 52000 0 Total fixed expenses 352000 189000 163000 Net operating Income (loss) -73000 -189000 -116000 Financial disadvantage = $116000

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