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 Dirt Bikes Mountain Racing Bikes Total Bikes $927,088 $267,000 402,000 258,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: 481,880 115,000 207 446,000 152,900 207,000159,00 99,008 195,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,900 21,008 15,300 35,100 51.688 123,000 $ 31,980 28,400 $ 27,500 $ (24,000) 76,680 8,700 7,700 43,5 20,500 114,688 41,900 185,480 53,400 414,18 123,668 38,500 80,488 167508 Total fixed expenses Net operating income (loss) 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

Explanation / Answer

Solution 1:

Solution 2:

As there is net financial disadvantage of $42,900, therefore production and sale of racing bikes should not be discontinued.

Solution 3:

Incremental Analysis - Regal Cycle - Racing Bikes Particulars Continue Racing Bikes (Alt 1) Discontinue Racing Bikes (Alt2) Financial advantage (disadvantage) of Alternative 2 Sales $258,000.00 $0.00 -$258,000.00 Variable manufacturing and selling expenses $159,000.00 $0.00 -$159,000.00 Contribution Margin $99,000.00 $0.00 -$99,000.00 Fixed Expenses: Advertising Traceable $21,000.00 $0.00 -$21,000.00 Salaries of Product line manager $35,100.00 $0.00 -$35,100.00 Net Income $42,900.00 $0.00 -$42,900.00

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