The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2438621 • 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
$
930,000
$
269,000
$
402,000
$
259,000
Variable manufacturing and selling expenses
467,000
117,000
192,000
158,000
Contribution margin
463,000
152,000
210,000
101,000
Fixed expenses:
Advertising, traceable
70,500
8,800
41,000
20,700
Depreciation of special equipment
42,500
20,200
7,100
15,200
Salaries of product-line managers
115,100
40,700
38,800
35,600
Allocated common fixed expenses*
186,000
53,800
80,400
51,800
Total fixed expenses
414,100
123,500
167,300
123,300
Net operating income (loss)
$
48,900
$
28,500
$
42,700
$
(22,300)
*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.
Total
Dirt
Bikes
Mountain Bikes
Racing
Bikes
Sales
$
930,000
$
269,000
$
402,000
$
259,000
Variable manufacturing and selling expenses
467,000
117,000
192,000
158,000
Contribution margin
463,000
152,000
210,000
101,000
Fixed expenses:
Advertising, traceable
70,500
8,800
41,000
20,700
Depreciation of special equipment
42,500
20,200
7,100
15,200
Salaries of product-line managers
115,100
40,700
38,800
35,600
Allocated common fixed expenses*
186,000
53,800
80,400
51,800
Total fixed expenses
414,100
123,500
167,300
123,300
Net operating income (loss)
$
48,900
$
28,500
$
42,700
$
(22,300)
Explanation / Answer
Incremental Analysis TOTAL Discontinue Net Increase/(Decrease) AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 930,000 671,000 -259,000 Less: Variable cost 467,000 309,000 158,000 Contribution margin 463,000 362,000 -101,000 Less: Fixed cost Advertisement 70,500 49,800 20,700 Depreciation 42,500 42,500 0 Salary of product line manager 115,100 79,500 35,600 Common Fixed cost 186,000 186,000 0 SEGMENT MARGIN 48,900 4,200 -44,700 No, Racing Rike Division Shall not be Discontinued SEGMENT-WISE INCOME STATEMENT TOTAL Dirt Mountain Racing AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 930,000 269,000 402,000 259,000 Less: Variable cost 467,000 117,000 192,000 158,000 Contribution margin 463,000 152,000 210,000 101,000 Less: Traceable Expense Advertisement 70,500 8,800 41,000 20,700 Depreciation 42,500 20,200 7,100 15,200 Salary of product line manager 115,100 40,700 38,800 35,600 Total Traecable expense 228,100 69,700 86,900 71,500 SEGMENT MARGIN 234,900 82,300 123,100 29,500 Less: Common Fixed expesne 186,000 Net Operating Income 48,900
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