Question

Exercise 11-15 Dropping or Retaining a Segment [LO11-2] 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

Explanation:

Calculation to determine the financial advantage (disadvantage) of discontinuing the bilge pump product line

First step is to calculate the fixed expense

Using this formula

Fixed expense

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

Let plug in the formula

Fixed expense= 270,000 + 32,000 + $8,000

Fixed expense= $310,000

Now let calculate the financial advantage (disadvantage)

Using this formula

Financial advantage (disadvantage) = Fixed expense-Contribution margin

Let plug in the formula

Financial advantage (disadvantage) = $310,000-460,000

Financial advantage (disadvantage) = -$150,000

Therefore the financial advantage (disadvantage) of discontinuing the bilge pump product line is -$150,000