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: Thalassines Kataskeves, S.A. Income Stat ement-Bilge Pump For the Quarter Ended March 31 Sales Variable expenses: Variable manufacturing expenses Sales commissions $470,000 $ 134,000 44,000 18,000 Shipping Total variable expenses Contribution margin Fixed expenses: Advertising (for the bilge pump product line) Depreciation of equipment (no resale value) 196,000 274,000 23,000 119,000 General facto ry overhead Salary of product-line manager Insurance on inventories 34,000* 121,000 14,000 Purchasing department Total fixed expenses 58,000t 369,000 (95,000) Net operating loss *Common costs allocated on the basis of machine-hours. fCommon 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?

Answer 1

	Keep Product Line	Drop Product Line	Difference:Net Operating Income Increase or (Decrease)
Sales	470000	0	-470000
Variable expenses:
Variable manufacturing expenses	134000	0	134000
Sales commissions	44000	0	44000
Shipping	18000	0	18000
Total variable expenses	196000	0	196000
Contribution margin	274000	0	-274000
Fixed expenses:
Advertising	23000	0	23000
Depreciation of equipment	119000	119000	0
General factory overhead	34000	34000	0
Salary of product line manager	121000	0	121000
Insurance on inventories	14000	0	14000
Purchasing department	58000	58000	0
Total fixed expenses	369000	211000	158000
Net operating Income (loss)	-95000	-211000	-116000
Financial (disadvantage) (116000)