Question

Graded Problems Thalassines kataskeves, SA, 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: $ 470,000 $ 125,000 43,000 25,000 Thalassines Kataakeves, S.A. Income Statement-Bilge Pump For the Quarter Ended March 31 Sales Variable expensest Variable manufacturing expenses Sales commissions Shipping Total variable expenses Contribution angin Fixed expenses Advertising (for the bilge pump product line) Depreciation of equipment (no resale value) General factory overhead Salary of product-line manager Insurance on inventories Purchasing department Total Fixed expenses Net operating loss 193,000 27,000 24,000 109,000 45,000 118,000 10,000 42,000+ 340,000 5 (71,000) "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?

Answer 1

	Keep Product Line	Drop Product Line	Difference:Net Operating Income Increase or (Decrease)
Sales	470000	0	-470000
Variable expenses:
Variable manufacturing expenses	125000	0	125000
Sales commissions	43000	0	43000
Shipping	25000	0	25000
Total variable expenses	193000	0	193000
Contribution margin	277000	0	-277000
Fixed expenses:
Advertising	24000	0	24000
Depreciation of equipment	109000	109000	0
General factory overhead	45000	45000	0
Salary of product line manager	118000	0	118000
Insurance on inventories	10000	0	10000
Purchasing department	42000	42000	0
Total fixed expenses	348000	196000	152000
Net operating Income (loss)	-71000	-196000	-125000
Financial (disadvantage) (125000)