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 Mountain Racing Bikes Total Bikes Bikes Sales Variable manufacturing and selling $921,000 $264,000 407,000 250,000 475,000 118,000 201,000 156,000 expenseS Contribution margin Fixed expenses: 446,000 146,000 206,000 94,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,900 7,500 38,900 81,400 412,500 121,800 168,700 70,300 20,900 15,900 35,200 50,000 122,000 $ 33,500 24,200 37,300 $(28,000) 8,500 43,700 20,300 114,300 40,200 52,800 184,200 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 Required 1Required 2 Required3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Financial (disadvantage) per quarter

Explanation / Answer

Req 1: Financial advantage/(Disadvantage): Loss of revenue of racing bike segment -250000 Less: Savings in cost V variable manufacturing and selling cost 156000 Savings in advertisement expense 20900 Savings in Product line managers 35200 Financial disadvantage of Discontinuance -37900 Hence, Segment Raciing bikes shall not be discontinued. SEGMENT-WISE INCOME STATEMENT OF ROCKY MOUNTAIN REGION TOTAL Dirt Bikes Mountain Racing bikes AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 921,000 264,000 407,000 250,000 Less: Variable cost 475,000 118,000 201,000 156,000 Contribution margin 446,000 146,000 206,000 94,000 Less: Traceable Fixed cost Advertisement expense 70,300 8,500 40,900 20,900 Depreciation expense 43,700 20,300 7,500 15,900 Salaries of product line manager 114,300 40,200 38,900 35,200 SEGMENT MARGIN 217,700 77,000 118,700 22,000 Less: Common Fixed expense 184,200 Net Operating Income 33,500

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