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 Sales $ 931,000 $270,000 $ 407,000 254,000 Variable manufacturing and selling expenses 471,000118,000202,000 151,00e 103,000 Contribution margin Fixed expenses: 460,000 152,000 205,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 40,800 7,900 38,300 81,400 20,900 15,900 35,900 50,800 69,900 8,200 44,600 20,800 115,000 40,800 186,200 415,700123,800168,400123,500 54,000 Total fixed expenses Net operating income (loss) $ 44,300 28,200 $ 36,600 (20,500) 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

Explanation / Answer

Financial advantage / (disadvantage of discontinuing the racing bikes:

Since there is net financial diadvantage of discontinuing production & sale of racing bikes, it is advisable to continue the Racing Bikes Division.

Segmented Income Statement:

Loss of Contribution Margin          1,03,000 Savings: Advertsing Expense             20,900 Salaries of Prodct Line Managers             35,900 Net Financial Disadvantage           (46,200)

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