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 $922,000 $261,000 $ 410,000 251,000 154,000 97,000 Variable manufacturing and selling 466,000 113,000 199,000 expenses Contribution margin Pixed expenses: 456, 000 148,000 211,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,300 7,300 38,500 82,000 411,200 122,100 168,100 69,600 20,400 15,200 35,200 50,200 121,000 $ 44,800 25,900 42,900 $(24,000) 8,900 43,000 20,500 114,200 40,500 52,200 184,400 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.

Explanation / Answer

1. Financial advantage (Disadvantage) per quarter of discontinuing the racing bikes

Contribution Margin

Profit of racing Bike Segment is $ 26200 Before Allocating Comman Fixed Costs.

If Segment Discontinuing Regal Cycle Company Suffer Additional Loss of $ 26200 per Quarter.

2.Comman Fixed Costs are sunk Cost for decision making if company Discontinuing racing Bike Segment company inccured loss of $ 104800/- per year being segment contribute fevuarable So Segment Should not Discontinue for financially reasons.

3.

Particulars Amount in $ Sale 251000 variable Costs 154000

Contribution Margin

97000 Relevent Fixed Cost Advertisement Traceble 20400 depreciation on special Equipment 15200 Salaries of Product line managers 35200 Profit Of Segment 26200

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