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 Variable expenses: 440,000 $ 126,000 55,000 15,000 Variable manufacturing expenses ales commissions Shipping Total variable expenses Contribution margin Fixed expenses: 196,000 244,000 21,000 115,000 41,000 113,000 15,000 58,000t Advertising (for the bilge pump product line) Depreciation of equipment (no resale value) General factory overhead Salary of product-line manager Insurance on inventories Purchasing department Total fixed expenses Net operating loss 363,000 $ (119,000) Common costs allocated on the basis of machine-hours tCommon 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?
a) Financial advantage
b) Financial (disadvantage)

Answer 1

Answer:

Financial disadvantage = $95,000

Explanation:

As per the data given in the question,

Loss of contribution margin = $244,000

Saving from avoidable fixed expenses

Advertising cost = $21,000

salary of product line manager = $113,000

Insurance of inventories = $15,000

Total saving of fixed cost = ($21,000 + $113,000 + $15,000)

= $149,000

Financial disadvantage = ($244,000-$149,000)

= $95,000