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: $ 480,000 $ 122,000 42,000 15,000 179,000 301,000 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 21,000 102,000 39,000* 117,000 12,000 51,000+ 342,000 $ (41,000) *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

Financial advantage (Disadvantage)

= Avoidable fixed costs - Contribution margin lost

= (21,000+117,000+12,000) - 301,000

= 150,000 - 301,000

Financial disadvantage (151,000)