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				$	450,000
Variable expenses:
Variable manufacturing expenses	$	123,000
Sales commissions		55,000
Shipping		21,000
Total variable expenses					199,000
Contribution margin					251,000
Fixed expenses:
Advertising (for the bilge pump product line)		28,000
Depreciation of equipment (no resale value)		106,000
General factory overhead		43,000	*
Salary of product-line manager		114,000
Insurance on inventories		11,000
Purchasing department		48,000	†
Total fixed expenses					350,000
Net operating loss				$	(99,000	)

*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	450000	0	-450000
Variable expenses:
Variable manufacturing expenses	123000	0	123000
Sales commissions	55000	0	55000
Shipping	21000	0	21000
Total variable expenses	199000	0	199000
Contribution margin	251000	0	-251000
Fixed expenses:
Advertising	28000	0	28000
Depreciation of equipment	106000	106000	0
General factory overhead	43000	43000	0
Salary of product line manager	114000	0	114000
Insurance on inventories	11000	0	11000
Purchasing department	48000	48000	0
Total fixed expenses	350000	197000	153000
Net operating Income (loss)	-99000	-197000	-98000
Financial (disadvantage) (98000)