The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2464764 • 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:
Mountain
Bikes
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.
What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
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:
Explanation / Answer
Contribution lost
(103,000)
Avoidable fixed cost
Advertising
20,900
Salaries
36,300
Decrease in net income
(45,800)
1b) No
(2) Segmented income statement
total
Dirt
Mountain
Racing
Sales
930,000
269,000
408,000
253,000
Variable
467,000
116,000
201,000
150,000
Contribution
463,000
153,000
207,000
103,000
Traceable fixed expenses:
Advertising
70,400
8,900
40,600
20,900
Depreciation
43,800
20,500
7,600
15,700
Salaries
115,500
40,600
38,600
36,300
Total traceable fixed expense
229,700
70,000
86,800
72,900
Product margin
233,300
83,000
120,200
30,100
Common fixed cost
186,000
Net income
47,300
2B) yes
Contribution lost
(103,000)
Avoidable fixed cost
Advertising
20,900
Salaries
36,300
Decrease in net income
(45,800)
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