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:

*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.

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.

Total Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 933,000 $ 270,000 $ 405,000 $ 258,000 Variable manufacturing and selling expenses 470,000 114,000 200,000 156,000 Contribution margin 463,000 156,000 205,000 102,000 Fixed expenses: Advertising, traceable 69,400 8,300 40,400 20,700 Depreciation of special equipment 43,600 20,900 7,100 15,600 Salaries of product-line managers 115,800 40,100 38,900 36,800 Allocated common fixed expenses* 186,600 54,000 81,000 51,600 Total fixed expenses 415,400 123,300 167,400 124,700 Net operating income (loss) $ 47,600 $ 32,700 $ 37,600 $ (22,700)

Explanation / Answer

1.

2. No

3.

Contribution lost on discontinuing the racing bikes ($102000) Savings in traceable expenses: Advertising 20700 Salaries of product-line managers 36800 Financial (disadvantage) per quarter of discontinuing the Racing Bikes ($44500)

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