The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2481206 • 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
Answer to Point No 1(a)
Allocated fixed cost pertaining to Racing bikes are fixed in nature. It can not be avoided by discounting that segment.but other fixed expenses are specific in nature and can be avoided by discounting that segment.
So Allocated fixed cosr $51,000 apportioned between Other two segment based on their sales value
Negative impact of $28,800 on total operating profit if Racing bike segment is discontinued.
Answer to point no (1)(b)
No,Production and sale of the racing bikes be should not be discontinued
Answer to point no (2)(a)
Prepare a segmented income statement.
Answer to point no (2)(b)
Yes,segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
Particulars Total Dirt Bikes Mountain Bikes Racing Bikes sales 926,000.00 267,000.00 404,000.00 255,000.00 Variable manufacturing and selling expenses 467,000.00 110,000.00 204,000.00 153,000.00 Contribution margin 459,000.00 157,000.00 200,000.00 102,000.00 Fixed expenses: Advertising, traceable 69,900.00 8,800.00 40,200.00 20,900.00 Depreciation of special equipment 44,600.00 20,900.00 7,800.00 15,900.00 Salaries of product-line managers 115,800.00 41,000.00 38,400.00 36,400.00 Allocated common fixed expenses* 185,200.00 53,400.00 80,800.00 51,000.00 Total fixed expenses 415,500.00 124,100.00 167,200.00 124,200.00 Net operating income (loss) 43,500.00 32,900.00 32,800.00 (22,200.00) Net Operating Income if Racing Bike Discontiued 14,700.00 12,606.41 2,093.59 - Impact on Operating Profit (28,800.00) (20,293.59) (30,706.41) 22,200.00 Working noteRelated Questions
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