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 Sales Variable manufacturing and selling $925,000 $263,000 403,000 259,000 156,000 475,000 113,000 206,000 expenses Contribution margin Fixed expenses: 450, 000 150,000 197,000 103,000 8,800 20,200 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,300 15,800 35,600 51,800 123,500 $ 37,000 27,900 29,600 (20,500) 40,800 7,500 38,500 80,600 413,000 122,100 167,400 69,900 43,500 114,600 40,500 185,000 52,600 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.

Explanation / Answer

Solution 1:

Solution 2:

Production and sale of racing bikes should not be discontinues as it will result in increase in loss of $47,100.

Solution 3:

Regal Cycle - Racing Bikes Particulars Continue Racing Bikes Discontinue Racing Bikes Financial advantage (disadvantage) Sales $259,000.00 $0.00 -$259,000.00 Variable manufacturing and selling expenses $156,000.00 $0.00 -$156,000.00 Contribution Margin $103,000.00 $0.00 -$103,000.00 Fixed Expenses: Advertising Traceable $20,300.00 $0.00 -$20,300.00 Depreciation $15,800.00 $15,800.00 $0.00 Salaries of Product line manager $35,600.00 $0.00 -$35,600.00 Allocated common fixed expenses $51,800.00 $51,800.00 $0.00 Net Income -$20,500.00 -$67,600.00 -$47,100.00

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