Question

Dropping a Segment 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: 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. $850,000 $330,000 42,000 18,000 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.. Rxed expenses: Advertising Depreciation of equipment (no resale value General factory overhead.. Salary of product-line manager Insurance on Inventories... Purchasing department.. Total food expenses. Net operating loss. 390,000 460,000 270,000 80,000 105.000 32.000 8,000 45,000 540,000 $ (80,000 *Common costs allocated on the basis of machine-hours. Common costs allocated on the basis of sales dollars. Required: Would you recommend that the bilge pump product line be discontinued? Support your answer with appropriate computations.

Answer 1

Answer- The financial (disadvantage) of discontinuing the bilge pump product line = $(150000).Hence bilge pump product should not be discontinued.

Explanation-

Thalassines Kataskeves, S.A.
Computation of increase or decrease of net operating income if the product line is continued or discontinued
Particulars	Keep Product Line	Drop Product Line	Difference Net Operating Income Increase or Decrease
	$	$	$
Sales	850000	0	-850000
Less- Variable Expesnes
Variable manufacturing expenses	330000	0	330000
Sales commissions	42000	0	42000
Shipping	18000	0	18000
Total variable expenses	390000	0	390000
Contribution margin	460000	0	-460000
Less- Fixed Expesnes
Advertising	270000	0	270000
Depreciation of equipment	80000	80000	0
General factory overhead	105000	105000	0
Salary of product line manager	32000	0	32000
Insurance on inventories	8000	0	8000
Purchasing department	45000	45000	0
Total fixed expenses	540000	230000	310000
Net operating Income (loss)	-80000	-230000	-150000