Thalassines Kataskeves, S.A., of Greece makes marine equipment.The company has been experiencing losses on its bilge pump productline for several years. The most recent quarterly contributionformat income statement for the bilge pump product linefollows:
Thalassines Kataskeves, S.A.
Income Statement—Bilge Pump
For the Quarter Ended March 31 |
| Sales | | | | $ | 460,000 | |
| Variable expenses: | | | | | | |
| Variable manufacturing expenses | $ | 132,000 | | | | |
| Sales commissions | | 49,000 | | | | |
| Shipping | | 20,000 | | | | |
| Total variable expenses | | | | | 201,000 | |
| Contribution margin | | | | | 259,000 | |
| Fixed expenses: | | | | | | |
| Advertising (for the bilge pump product line) | | 28,000 | | | | |
| Depreciation of equipment (no resale value) | | 101,000 | | | | |
| General factory overhead | | 50,000 | * | | | |
| Salary of product-line manager | | 121,000 | | | | |
| Insurance on inventories | | 6,000 | | | | |
| Purchasing department | | 60,000 | †| | | |
| Total fixed expenses | | | | | 366,000 | |
| Net operating loss | | | | $ | (107,000 | ) |
|
*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 salesof other product lines and would have no effect on the company’stotal general factory overhead or total Purchasing Departmentexpenses.
Required:
What is the financial advantage (disadvantage) of discontinuingthe bilge pump product line?
