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Thalasines Katakeves, S.A., of Greece makes marine equipment. The company has been experiencing...

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Thalasines Katakeves, 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 Katakeves, S.A. Income Statement - Bilge Pump for the Quarter Ended March 31

Sales $490,000
Variable expenses:
Variable manufacturing expenses $132,000
Sales commissions 50,000
Shipping 22,000
Total variable expenses 204,000
Contribution margin 286,000
Fixed expenses
Advertising 27,000
Depreciation of equipment (no resale value 106,000
General factory overhead 45,000*
Salary of product-line manager 111,000
Insurance on inventories 11,000
Purchasing department 53,000**
Total fixed expenses 353,000
Net operating loss $(67,000)

(*) 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

a. Compute the increase or decrease of net operating income if the product line is continued or discontinued. (Decreases should? be indicated by a minus sign.)

Effect of Discontinuing a Product Line:

When a company is considering eliminating a seemingly loss-making product line, using the loss reported in financial reports will be misleading, because not all allocated fixed costs will be avoided if the line is discontinued.

Answer and Explanation:


a. The effect on operating income will be:

Loss in product contribution margin ($286,000)
Saving of avoidable fixed costs:
Advertising 27,000
Depreciation of equipment
unavoidable so irrelevant
General factory overhead
unavoidable so irrelevant
Salary of product-line manager 111,000
Insurance on inventories 11,000
Purchasing department
unavoidable so irrelevant
Increase (decrease) in operating income if the line is discontinued ($137,000)



Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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