Exercise 12-15 Dropping or Retaining a Segment [LO12-2]

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 StatementBilge Pump For the Quarter Ended March 31
Sales				$	430,000
Variable expenses:
Variable manufacturing expenses	$	123,000
Sales commissions		54,000
Shipping		17,000
Total variable expenses					194,000
Contribution margin					236,000
Fixed expenses:
Advertising		25,000
Depreciation of equipment (no resale value)		104,000
General factory overhead		37,000	*
Salary of product-line manager		126,000
Insurance on inventories		7,000
Purchasing department		49,000
Total fixed expenses					348,000
Net operating loss				$	(112,000	)

*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 companys 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.)

b.

Would you recommend that the bilge pump product line be discontinued?

	No
	Yes