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:

*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 Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 925,000 $ 269,000 $ 403,000 $ 253,000 Variable manufacturing and selling expenses 474,000 113,000 204,000 157,000 Contribution margin 451,000 156,000 199,000 96,000 Fixed expenses: Advertising, traceable 69,600 8,100 40,700 20,800 Depreciation of special equipment 43,300 20,800 7,300 15,200 Salaries of product-line managers 114,300 40,500 38,200 35,600 Allocated common fixed expenses* 185,000 53,800 80,600 50,600 Total fixed expenses 412,200 123,200 166,800 122,200 Net operating income (loss) $ 38,800 $ 32,800 $ 32,200 $ (26,200)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 925000 672000 -253000 Variable manufacturing and selling expenses 474000 317000 157000 Contribution margin (loss) 451000 355000 -96000 Fixed expenses: Advertising, traceable 69600 48800 20800 Depreciation on special equipment 43300 43300 0 Salaries of product manager 114300 78700 35600 Common allocated costs 185000 185000 0 Total fixed expenses 412200 355800 56400 Net operating income (loss) 38800 -800 -39600 Financial (disadvantage) ($39600) 2 No, 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 925000 269000 403000 253000 Variable manufacturing and selling expenses 474000 113000 204000 157000 Contribution margin (loss) 451000 156000 199000 96000 Traceable fixed expenses: Advertising, traceable 69600 8100 40700 20800 Depreciation on special equipment 43300 20800 7300 15200 Salaries of product manager 114300 40500 38200 35600 Total traceable fixed expenses 227200 69400 86200 71600 Product line segment margin 223800 86600 112800 24400 Common fixed expenses 185000 Net operating income (loss) 38800

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.