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Connect e Loose Leaf For Manager × X Secure https://newconnect.mheducation.com/flow/connect.html Chapter 12 Homework 6 Help Save & Exit Submit Saved Check my work 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 Bikes Total Bikes 0.75 Sales 919,008 $264,000 $ 4e2,000 $ 253,000 Variable manufacturing and selling expenses 467,112, 201,80154,900 99,008 points 201,008 Contribution margin Fixed expenses: 452,683152,068 Skippec Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 68,50a 8,100 43,708 20,50e 114,988 4,600 40,200 7,300 38,400 20,200 15,900 35, 980 50,688 122,668 41,108 30,000 $ 34,700 $(23,600} eBook Total fixed expenses Net operating income (loss) 418,98a 122,908 166,306 Hint 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 Mc Prey 17 of 22Next> Hill

Explanation / Answer

1) For calculating financial advantage (disadvantage) per quarter of discontinuing racing Bikes, we need to compare total operating profit(loss) of both the alternatives. Continuing Racing Bikes will include total revenue and cost of all the three bikes whereas discontinuing racing bikes will include total revenue and cost of Dirt Bikes and Mountain Bikes only.

Calculation of Financial advantage (disadvantage) per quarter (Amount in $)

Increase(Decrease)

(2-1)

The financial disadvantage per quarter of discontinuing the racing bikes is $42,900.

2) The production and sale of racing bikes should not be discontinued as there is a financial disadvantage of $42,900 in discontinuing the racing bikes.

3) Segmented Income Statement (Amount in $)

Particulars Continuing Racing Bikes (Total) (1) Discontinuing Racing Bikes (Total) (2)

Increase(Decrease)

(2-1)

Sales 919,000 666,000 (253,000) Less: Variable manufacturing and selling expenses 467,000 313,000 (154,000) Contribution margin 452,000 353,000 (99,000) Fixed Expenses : Advertising, traceable 68,500 48,300 (20,200) Depreciation of Special equipment 43,700 43,700 0 Salaries of Product line managers 114,900 79,000 (35,900) Allocated Common Fixed Expenses 183,800 183,800 0 Less: Total Fixed Expenses 410,900 354,800 (56,100) Operating profit(loss) 41,100 (1,800) (42,900)

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