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 Statement-Bilge Pump For the Quarter Ended March 31 Sales Variable expenses: Variable manufacturing expenses $ 410,000 $ 123,000 Sales commissions 44,000 18,000 k Shipping Total variable expenses Contribution margin 185, eee 225,00e Fixed expenses: rint Advertising (for the bilge pump product line) Depreciation of equipment (no resale value) 26, 000 109,000 45,eee 111,e0e 12,eee General factory overhead Salary of product-line manager Insurance on inventories Purchasing department Total fixed expenses 52,00әт 355,eee $(130,000) Net operating loss 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 ine?

Answer 1

Financial Disadvantage

$     76,000.00

Working

Statement showing Finantial Advantage or (Disadvantage) of Discontinuing a product line
Sales		$ 410,000
Variable expenses
Variable Manufacturing Expenses	$ 123,000
Sales Commission	$ 44,000
Shipping	$ 18,000	$ 185,000
Contribution		$ 225,000
Avoidable Fixed Expenses
Advertisement Expenses	$ 26,000
Salary of Product line Manager	$ 111,000
Insurance on Inventories	$ 12,000
Total Avoidable Fixed Cost		$ 149,000
Net Benefit of continuing or Net disadvantage of discontinuing		$ 76,000

.

Notes:
1) Unavoidable Fixed Cost will not be considered because they will occur even if no production is done.
2) Depreciation is not considered since equipment has zero salvage value and depreciation is a non cash expense.
3) Similarly General factory overheads and Purchasing department expenses will continue to occur at same level that is why they are also excluded from calculation