The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2578132 • 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:
Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 924,000 $ 265,000 $ 409,000 $ 250,000
Variable manufacturing and selling expenses 466,000 119,000 195,000 152,000
Contribution margin 458,000 146,000 214,000 98,000
Fixed expenses: Advertising, traceable 69,300 8,800 40,300 20,200
Depreciation of special equipment 42,800 20,400 7,200 15,200
Salaries of product-line managers 115,000 40,500 38,200 36,300
Allocated common fixed expenses* 184,800 53,000 81,800 50,000
Total fixed expenses 411,900 122,700 167,500 121,700
Net operating income (loss) $ 46,100 $ 23,300 $ 46,500 $ (23,700)
*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
Particulars
TOTAL
DIRT BIKE
MOUNTAIN BIKE
RACING BIKE
SALES
924000
265000
409000
250000
VARIABLE COST
466000
119000
195000
152000
CONTRIBUTION MARGIN
458000
146000
214000
98000
PERCENTAGE OF CONTRIBUTION
50%
55%
52%
39%
FIXED COST
ADVERTAISING
69300
8800
40300
20200
DEPRECIATION
42800
20400
7200
15200
SALARIES PRODUCT LINE MANAGERS
115000
40500
38200
36300
ALLOCTED COMMON EXPENSE
184800
53000
81800
50000
TOTAL FIXED EXPENSE
411900
122700
167500
121700
NET OPERATING INCOME
46100
23300
46500
(23700)
1
If the company discontinue the operation of racing bike unit can save advertising expense, depreciation, salaries gross amounting 71700(20200+15200+36300), but common expense allocated to racing unit cannot avoid so if company discontinue operation its overall profit reduced to 19800.
(23300+46500-50000)=19800
2
Discontinue of production and sale of racing department financially not beneficial to the company , otherwise it will reduce its overall profitability
3)
excisting operation reprt
Particulars
TOTAL
DIRT BIKE
MOUNTAIN BIKE
RACING BIKE
SALES
924000 (100%)
265000 (29%)
409000 (44.26%)
250000 (26.74%)
VARIABLE COST
466000
119000
195000
152000
CONTRIBUTION MARGIN
458000
146000
214000
98000
PERCENTAGE OF CONTRIBUTION
50%
55%
52%
39%
FIXED COST
ADVERTAISING
69300
8800
40300
20200
DEPRECIATION
42800
20400
7200
15200
SALARIES PRODUCT LINE MANAGERS
115000
40500
38200
36300
ALLOCTED COMMON EXPENSE
184800
53000
81800
50000
TOTAL FIXED EXPENSE
411900 (100%)
122700 (30%)
167500 (41%)
121700 (29%)
NET OPERATING INCOME
46100
23300
46500
(23700)
if racing bke unit discountinue
Particulars
TOTAL
DIRT BIKE
MOUNTAIN BIKE
SALES
674000 (100%)
265000 (39%)
409000 (61%)
VARIABLE COST
314000
119000
195000
CONTRIBUTION MARGIN
360000
146000
214000
PERCENTAGE OF CONTRIBUTION
53%
55%
52%
FIXED COST
ADVERTAISING
49100
8800
40300
DEPRECIATION
27600
20400
7200
SALARIES PRODUCT LINE MANAGERS
78700
40500
38200
ALLOCTED COMMON EXPENSE
184800
72660
112140
TOTAL FIXED EXPENSE
340200 (100%)
142360 (42%)
197840 (58%)
NET OPERATING INCOME
19800
3640
16160
Particulars
TOTAL
DIRT BIKE
MOUNTAIN BIKE
RACING BIKE
SALES
924000
265000
409000
250000
VARIABLE COST
466000
119000
195000
152000
CONTRIBUTION MARGIN
458000
146000
214000
98000
PERCENTAGE OF CONTRIBUTION
50%
55%
52%
39%
FIXED COST
ADVERTAISING
69300
8800
40300
20200
DEPRECIATION
42800
20400
7200
15200
SALARIES PRODUCT LINE MANAGERS
115000
40500
38200
36300
ALLOCTED COMMON EXPENSE
184800
53000
81800
50000
TOTAL FIXED EXPENSE
411900
122700
167500
121700
NET OPERATING INCOME
46100
23300
46500
(23700)
1
If the company discontinue the operation of racing bike unit can save advertising expense, depreciation, salaries gross amounting 71700(20200+15200+36300), but common expense allocated to racing unit cannot avoid so if company discontinue operation its overall profit reduced to 19800.
(23300+46500-50000)=19800
2
Discontinue of production and sale of racing department financially not beneficial to the company , otherwise it will reduce its overall profitability
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