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 $ 440,000 Variable expenses: Variable manufacturing expenses $ 124,000 Sales commissions 47,000 Shipping 23,000 Total variable expenses 194,000 Contribution margin 246,000 Fixed expenses: Advertising (for the bilge pump product line) 23,000 Depreciation of equipment (no resale value) 108,000 General factory overhead 45,000 * Salary of product-line manager 126,000 Insurance on inventories 8,000 Purchasing department 46,000 † Total fixed expenses 356,000 Net operating loss $ (110,000 ) *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:

- $89,000

Explanation:

The computation of the financial advantage or disadvantage is shown below:

= Contribution margin loss - fixed expense

where,

Contribution margin is - $246,000

And, the fixed expense would be

= Advertising (for the bilge pump product line) + Salary of product-line manager +  Insurance on inventories

= $23,000 + $126,000 + $8,000

= $157,000

Now put these values to the above formula  

So, the value would equal to

= - $246,000 - $157,000

= - $89,000

All other information which is given is not relevant. Hence, ignored it