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: $ 460,000 $ 135,000 48,000 _ 22,000 205,000 255,000 Thalassines kataskeves, S.A. Income Statement-Bilge Pump For the Quarter Ended March 31 Sales Variable expenses: Variable manufacturing expenses Sales commissions Shipping Total variable expenses Contribution margin 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 23,000 110,000 33,000 125,000 11,000 52,000+ 354,000 $ (99,000) *Common costs allocated on the basis of machine-hours. tCommon 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? Financial (disadvantage) sadvantage)

Answer 1

Answer is given below with differential analysis

Differential Analysis Continue Discontinue Differential Product Product $460,000 -$460,000 $135,000 $48,000 $22,000 $205,000 $255,000 -$135,000 $48,000 -$22,000 -$205,000 -$255,000 Sales Variable expenses manufacturing expenses sales commission shipping Total variable expenses Contribution Fixed expenses Advertising Depreciation General Factory overhead Salary of product line manager Insurance on inventories Purchasing department Total fixed expenses Net Operating Loss -$23,000 $110,000 $33,000 $23,000 $110,000 $33,000 $125,000 $11,000 $52,000 $354,000 -$99,000 -$125,000 -$11,000 $0 $52,000 $195,000 $195,000 $195,000 - $159,000 -$96,000 Financial disadvantage of discontinuing the bilge pump product line | $96,000