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:
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Thalassic Kataskeves, S.A. Income Statement-Bilge Pump
For the Quarter Ended March 31
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Sales
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€490,000
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Variable expenses:
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Variable manufacturing expenses
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€131,000
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Sales commissions
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46,000
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Shipping
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14,000
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Total variable expenses
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191,000
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Contribution margin
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299,000
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Fixed expenses:
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Advertising
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118,000
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Depreciation of equipment (no resale value)
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47,000
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General factory overhead
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110,000*
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Salary of product-line manager
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20,000
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Insurance on inventories
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12,000
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Purchasing department
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49,000†
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Total fixed expenses
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356,000
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Net operating loss
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€(57000)
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*Common costs allocated on the basis of machine-hours.
†Common costs allocated on the basis of sales euros.
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 bilge pump product line are continued or discontinued.
(b) Would you recommend that the bilge pump product line be discontinued?