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.
