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 Total Bikes Bikes Sales Variable manufacturing and selling $927,000 $264,000 408,000 255,000 473,000 112,000 209,000 152,000 454, 000 152,000 199,000 103,000 expenses Contribution margin Fixed expenses Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 8,600 43,600 20,200 114,800 40,200 185,400 52,800 20,300 16,000 36,000 51,000 413,400 121,800 168,300 123,300 40,600 30,200 30,700 (20,300) 40,700 7,400 38,600 81,600 69,600 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 2Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Explanation / Answer

Financial advantage/ Disadvantage Current Discontinuance Net incocme Increase/ Decrease Sales 927000 672000 -255000 Less: variable expense 473000 321000 152000 Contribution margin 454000 351000 -103000 Les: Fixed cost Advertisement 69600 49300 20300 Ddepreciation 43600 43600 0 Salary of product line manager 114800 78800 36000 Allocated common fixed expennse 185400 185400 0 Net financial disadvantage 40600 -6100 -46700 Net financial disadvantage is - $46700 Hence, Racing bike segment shall NOT DISCONTINUED SEGMENT-WISE INCOME STATEMENT TOTAL Dirt bikes Mouuntain Racing AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 927,000 264,000 408,000 255,000 Less: Variable cost 473,000 112,000 209,000 152,000 Contribution margin 454,000 152,000 199,000 103,000 Less: Traceable expense Advertisement 69,600 8,600 40,700 20,300 Depreciation 43,600 20,200 7,400 16,000 Salary of product line manager 114,800 40,200 38,600 36,000 Traceable fixed cost 228,000 69,000 86,700 72,300 SEGMENT MARGIN 226,000 83,000 112,300 30,700 Less: Allocated common fixed cost 185,400 Net Operating Income 40,600

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