The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2528526 • 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:
*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 DirtBikes Mountain Bikes Racing
Bikes Sales $ 917,000 $ 266,000 $ 400,000 $ 251,000 Variable manufacturing and selling expenses 464,000 116,000 196,000 152,000 Contribution margin 453,000 150,000 204,000 99,000 Fixed expenses: Advertising, traceable 69,200 8,200 40,500 20,500 Depreciation of special equipment 44,300 21,000 7,500 15,800 Salaries of product-line managers 114,200 40,200 38,700 35,300 Allocated common fixed expenses* 183,400 53,200 80,000 50,200 Total fixed expenses 411,100 122,600 166,700 121,800 Net operating income (loss) $ 41,900 $ 27,400 $ 37,300 $ (22,800)
Explanation / Answer
Answer:
1
Total
Total
If racing bike
are dropped
Diffrance:
net operating incmoe
incfese (decrese)
Sales
917000
666000
-251000
Variable manufacturing and selling expenses
464000
312000
152000
Contribution margin
453000
354000
-99000
Fixed expenses:
Advertising, traceable
69200
48700
20500
Depreciation of special equipment
44300
44300
0
Salaries of product-line managers
114200
78900
35300
Allocated common fixed expenses*
183400
183400
0
Total fixed expenses
411100
355300
55800
Net operating income (loss)
41900
-1300
-43200
_____________________________________________________________________
2
2. Should the production and sale of racing bikes be discontinued?
Answer:
No, production and sale of the racing bikes should not be discontinued.
If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $(43,200) each quarter:
__________________________________________________________________________
3
segmented income statement.
Total
Dirt
Bike
Mountain Bikes
Racing
Bikes
Sales
917000
266000
400000
251000
Variable manufacturing and selling expenses
464000
116000
196000
152000
Contribution margin
453000
150000
204000
99000
Fixed expenses:
Advertising, traceable
69200
8200
40500
20500
Depreciation of special equipment
44300
21000
7500
15800
Salaries of product-line managers
114200
40200
38700
35300
Total Tracable Fixed cost
227700
69400
86700
71600
Product segment Margin
225300
80600
117300
27400
common fixed expenses
183400
Net operating income (loss)
41900
Total
Total
If racing bike
are dropped
Diffrance:
net operating incmoe
incfese (decrese)
Sales
917000
666000
-251000
Variable manufacturing and selling expenses
464000
312000
152000
Contribution margin
453000
354000
-99000
Fixed expenses:
Advertising, traceable
69200
48700
20500
Depreciation of special equipment
44300
44300
0
Salaries of product-line managers
114200
78900
35300
Allocated common fixed expenses*
183400
183400
0
Total fixed expenses
411100
355300
55800
Net operating income (loss)
41900
-1300
-43200
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