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 $ 921,000 263,000 406,000 252,000 Variable manufacturing and selling expenses 459,000 113,000 193000 153,000 99,000 Sales Contribution margin Fixed expenses: 462,000 150,000 213,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 8,700 43,800 20,900 115,800 40,800 184,200 52,600 20,200 15,200 36, 500 50,400 69,100 40,200 7,700 38, 500 81,200 Total fixed expenses Net operating income (loss) 412,900 123,000167, $ 49,100 407: 600122,300 27,000 $ 45,400 $(23,300) 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

total if Difference racing bike Current are 1-a) total dropped Sales 921,000 669000 -252,000 Variable expenses 459,000 306000 153,000 contribution margin (loss) 462,000 363000 -99,000 fixed expenses Advertising,traceable 69,100 48900 20,200 Depreciation on special equipment 43,800 43,800 0 Salaries of product managers 115,800 79300 36,500 common allocated costs 184,200 184,200 0 total fixed expenses 412,900 356200 56,700 Net operating income(loss) 49,100 6800 -42,300 net operating income will decrease by 42,300 the financial disadvantage is 42,300 1-b) No 2a) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 921,000 263,000 406,000 252,000 variable manufacturing and selling expense 459,000 113,000 193,000 153,000 contribution margin (loss) 462,000 150,000 213,000 99,000 traceable fixed expenses advertising 69,100 8,700 40,200 20,200 depreciation on special equipment 43,800 20,900 7,700 15,200 salaries of the product line managers 115,800 40,800 38,500 36,500 total traceable fixed expenses 228,700 70,400 86,400 71,900 product line segment margin 233,300 79,600 126,600 27,100 common fixed expenses 184,200 net operating income(loss) 49,100

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