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 Bikes Mountain Racing Total Bikes Bikes $927,000 $263,000 407,000 257,000 480, 000 116,000 204,000 160,000 97,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: 447,000147,000 203,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,300 7,700 38,300 81,400 413,600 122,100 167,700 20,900 15,500 36,000 51,400 123, 800 33,400 24,900 35,300 $(26, 800) 69,500 43,800 8,300 20,600 114,900 40,600 52,600 185,400 Total fixed expenses Net operating income (loss) 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

26800/4= disadvantage of 6700 per quarter

No production of racing bikes should not be discontinued because of the fixed cost of $123800 which will continue to occur. So if company discontinue it then company will have higher losses.

If company discontinue then it will have loss of $123800 but if continues then there is loss of $26800 only. So better to continue.

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