The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2399600 • Letter: T
Question
The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:
Total
Dirt
Bikes
Mountain Bikes
Racing
Bikes
Sales
$
924,000
$
270,000
$
402,000
$
252,000
Variable manufacturing and selling expenses
456,000
114,000
190,000
152,000
Contribution margin
468,000
156,000
212,000
100,000
Fixed expenses:
Advertising, traceable
69,700
8,200
40,800
20,700
Depreciation of special equipment
43,100
20,200
7,500
15,400
Salaries of product-line managers
115,500
41,000
38,800
35,700
Allocated common fixed expenses*
184,800
54,000
80,400
50,400
Total fixed expenses
413,100
123,400
167,500
122,200
Net operating income (loss)
$
54,900
$
32,600
$
44,500
$
(22,200)
*Allocated on the basis of sales dollars.
Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. Should the production and sale of racing bikes be discontinued?
3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
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Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.
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Totals
Dirt Bikes
Mountain Bikes
Racing Bikes
Contribution margin (loss)
Traceable fixed expenses:
Total traceable fixed expenses
Product line segment margin (loss)
Net operating income (loss)
Total
Dirt
Bikes
Mountain Bikes
Racing
Bikes
Sales
$
924,000
$
270,000
$
402,000
$
252,000
Variable manufacturing and selling expenses
456,000
114,000
190,000
152,000
Contribution margin
468,000
156,000
212,000
100,000
Fixed expenses:
Advertising, traceable
69,700
8,200
40,800
20,700
Depreciation of special equipment
43,100
20,200
7,500
15,400
Salaries of product-line managers
115,500
41,000
38,800
35,700
Allocated common fixed expenses*
184,800
54,000
80,400
50,400
Total fixed expenses
413,100
123,400
167,500
122,200
Net operating income (loss)
$
54,900
$
32,600
$
44,500
$
(22,200)
Explanation / Answer
Incremental Analysis TOTAL Discontinue Net Increase/(Decrease) AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 924,000 672,000 -252,000 Less: Variable cost 456,000 304,000 152,000 Contribution margin 468,000 368,000 -100,000 Less: Fixed cost Advertisement 69,700 49,000 20,700 Depreciation 43,100 43,100 0 Salary of product line manager 115,500 79,800 35,700 Common Fixed cost 184,800 184,800 0 SEGMENT MARGIN 54,900 11,300 -43,600 No, Racing Rike Division Shall not be Discontinued SEGMENT-WISE INCOME STATEMENT TOTAL Dirt Mountain Racing AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 924,000 270,000 402,000 252,000 Less: Variable cost 456,000 114,000 190,000 152,000 Contribution margin 468,000 156,000 212,000 100,000 Less: Traceable Expense Advertisement 69,700 8,200 40,800 20,700 Depreciation 43,100 20,200 7,500 15,400 Salary of product line manager 115,500 41,000 38,800 35,700 Total Traecable expense 228,300 69,400 87,100 71,800 SEGMENT MARGIN 239,700 86,600 124,900 28,200 Less: Common Fixed expesne 184,800 Net Operating Income 54,900
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