The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2543604 • Letter: T
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:
1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)
1b. Should production and sale of the racing bikes be discontinued?
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
rev: 11_15_2016_QC
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 921,000 $ 263,000 $ 400,000 $ 258,000 Variable manufacturing and selling expenses 481,000 115,000 207,000 159,000 Contribution margin 440,000 148,000 193,000 99,000 Fixed expenses: Advertising, traceable 70,300 8,900 40,800 20,600 Depreciation of special equipment 43,500 20,600 7,700 15,200 Salaries of product-line managers 115,100 40,700 38,400 36,000 Allocated common fixed expenses* 184,200 52,600 80,000 51,600 Total fixed expenses 413,100 122,800 166,900 123,400
Net operating income (loss) $ 26,900 $ 25,200 $ 26,100 $ (24,400)
Explanation / Answer
Answer:
1-a)
What is the impact on net operating income by discontinuing racing bikes
Current Total
Total If Racing Bikes Are Dropped
Difference: Net Operating Income Increase or (Decrease)
Sales
921,000
663,000
-258,000
Variable manufacturing and selling expenses
481,000
322,000
159,000
Contribution margin (loss)
440,000
341,000
-99,000
Fixed expenses:
Advertising, traceable
70,300
49,700
20,600
Depreciation of special equipment
43,500
43,500
0
Salaries of product-line managers
115,100
79,100
36,000
Allocated common fixed expenses*
184,200
184,200
0
Total fixed expenses
413,100
356,500
56,600
Net operating income (loss)
26,900
-15,500
-42,400
________________________________________
2
Should production and sale of the racing bikes be discontinued
Answer:
No
_________________________________________
3
Totals
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
921,000
263,000
400,000
258,000
Variable manufacturing and selling expenses
481,000
115,000
207,000
159,000
Contribution margin
440,000
148,000
193,000
99,000
Fixed expenses:
Advertising, traceable
70,300
8,900
40,800
20,600
Depreciation of special equipment
43,500
20,600
7,700
15,200
Salaries of product-line managers
115,100
40,700
38,400
36,000
Total tracable fixed Expanses
228,900
70,200
86,900
71,800
Product line segment ,argin
211,100
77,800
106,100
27,200
common fixed expenses
184,200
Net operating income (loss)
26,900
___________________________________________
4
. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
Answer: Yes
Current Total
Total If Racing Bikes Are Dropped
Difference: Net Operating Income Increase or (Decrease)
Sales
921,000
663,000
-258,000
Variable manufacturing and selling expenses
481,000
322,000
159,000
Contribution margin (loss)
440,000
341,000
-99,000
Fixed expenses:
Advertising, traceable
70,300
49,700
20,600
Depreciation of special equipment
43,500
43,500
0
Salaries of product-line managers
115,100
79,100
36,000
Allocated common fixed expenses*
184,200
184,200
0
Total fixed expenses
413,100
356,500
56,600
Net operating income (loss)
26,900
-15,500
-42,400
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