The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun

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 $ 925,000 $ 262,000 $ 404,000 $ 259,000 Variable manufacturing and selling expenses 467,000 116,000 195,000 156,000 Contribution margin 458,000 146,000 209,000 103,000 Fixed expenses: Advertising, traceable 69,000 8,200 40,100 20,700 Depreciation of special equipment 44,400 21,000 7,900 15,500 Salaries of product-line managers 115,000 40,700 38,700 35,600 Allocated common fixed expenses* 185,000 52,400 80,800 51,800 Total fixed expenses 413,400 122,300 167,500 123,600 Net operating income (loss) $ 44,600 $ 23,700 $ 41,500 $ (20,600) *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.

Complete this question by entering your answers in the tabs below. Required 1 Required 2Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 2>

Explanation / Answer

total if Difference racing bike Current are 1-a) total dropped Sales 925,000 666000 -259,000 Variable expenses 467,000 311000 156,000 contribution margin (loss) 458,000 355000 -103,000 fixed expenses Advertising,traceable 69,000 48300 20,700 Depreciation on special equipment 44,400 44,400 0 Salaries of product managers 115,000 79400 35,600 common allocated costs 185,000 185,000 0 total fixed expenses 413,400 357100 56,300 Net operating income(loss) 44,600 -2100 -46,700 Net financial disadvantage ($46,700) 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 925,000 262,000 404,000 259,000 variable manufacturing and selling expense 467,000 116,000 195,000 156,000 contribution margin (loss) 458,000 146,000 209,000 103,000 traceable fixed expenses advertising 69,000 8,200 40,100 20,700 depreciation on special equipment 44,400 21,000 7,900 15,500 salaries of the product line managers 115,000 40,700 38,700 35,600 total traceable fixed expenses 228,400 69,900 86,700 71,800 product line segment margin 229,600 76,100 122,300 31,200 common fixed expenses 185,000 net operating income(loss) 44,600 2b) yes

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