The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2465117 • 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
1a )Decrease in net operating income
Particulars
Racing Bikes
Contribution Margin Lost
(107,000)
Fixed Cost can be avoided:
Advertising ,Traceble
20,200
Salaries of Product Line Managers
35,200
Decrease in Operating Income
(51,600)
Decrease in net operating income for the Company as a whole $ 51,600
The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will also continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision
1 b)
No, production and sale of the racing bikes should not be discontinued as the Loss reaches to $ 12,800.
2a)
Particulars
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
670,000
269,000
401,000
Variable manufacturing and Selling Exp
325,000
120,000
205,000
Contribution Margin
345,000
149,000
196,000
-
Fixed Expenses:
Advertising ,Traceble
48,900
8,100
40,800
Depreciation of Spl Equipment
43,900
20,300
7,800
15,800
Salaries of Product Line Managers
79,400
40,800
38,600
Total Fixed Expenses
172,200
69,200
87,200
15,800
Product line Profit
172,800
79,800
108,800
(15,800)
Common Fixed Cost
185,600
Net Operating Income
(12,800)
2b) Yes
Particulars
Racing Bikes
Contribution Margin Lost
(107,000)
Fixed Cost can be avoided:
Advertising ,Traceble
20,200
Salaries of Product Line Managers
35,200
Decrease in Operating Income
(51,600)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.