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 $ 850,000 Variable expenses: Variable manufacturing expenses $ 330,000 Sales commissions 42,000 Shipping 18,000 Total variable expenses 390,000 Contribution margin 460,000 Fixed expenses: Advertising (for the bilge pump product line) 270,000 Depreciation of equipment (no resale value) 80,000 General factory overhead 105,000 * Salary of product-line manager 32,000 Insurance on inventories 8,000 Purchasing department 45,000 † Total fixed expenses 540,000 Net operating loss $ (80,000 ) *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

Answer: $150,000 financial disadvantage.

Explanation:

Discontinuing the bilge pump product line will eliminate its variable costs but however we are told that some fixed costs will remain.

So then to find out the financial advantage (disadvantage), the fixed costs that will be removed/ saved need to be removed as well to see what will be left if the line is discontinued.

The Contribution Margin is Sales less variable costs so it already removes the Variable cost savings.

Discontinuing would have no effect on the company’s total general factory overhead or total Purchasing Department expenses so the fixed cost savings will be from Advertising, Salary of Product line manager and insurance of inventories.

Fixed cost savings = 270,000 + 32,000 + 8,000

= $310,000

The Contribution Margin the company is losing is ($460,000) by discontinuing.

Less the fixed costs saved,

= (460,000) + 310,000

= ($150,000)

Costs of ($150,000) remain after the fixed costs saved have been accounted for.

The company is therefore at a financial (disadvantage) of $150,000 for discontinuing the bilge pump product.