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: Mountain Bikes Racing Bikes Total Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $ 933, 000 $ 267,000 410, 000 256, 000 461, 000 472, 000 117,000 150,000 194,000150, 000 106,000 216, 000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 70,400 43,800 116, 000 186, 600 416, B00 $ 55,200 8,500 20,400 40,500 53,400 122, 800 40,900 7,500 38, 700 82,000 169, 100 21,000 15, 900 36, 800 51,200 124,900 46, 900 (18,900) Total fixed expenses Net operating income (loss) 27,200 $ 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 Required 1Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? ancial (disadvantage) per quarter uired1Required 2 Required 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 Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Explanation / Answer

Solution 1:

Financial advantage (disadvantage) from discontinuing the racing bike per quarter = ($48,200)

Solution 2:

As there is net financial disadvantage , therefore racing bike should not be dropped.

Solution 3:

Impact on net income on discontinuing racing bike Particulars Current Total Total if racing bikes are dropped Difference: Net Operating income increase (decrease) Sales $933,000.00 $677,000.00 -$256,000.00 Variable manufacturing and selling expenses $461,000.00 $311,000.00 -$150,000.00 Contribution margin $472,000.00 $366,000.00 -$106,000.00 Fixed expenses: Advertising traceable $70,400.00 $49,400.00 -$21,000.00 Depreciation of special equipment $43,800.00 $43,800.00 $0.00 Salaries of product manager $116,000.00 $79,200.00 -$36,800.00 Common allocated costs $186,600.00 $186,600.00 $0.00 Total fixed expenses $416,800.00 $359,000.00 -$57,800.00 Net Operating income (loss) $55,200.00 $7,000.00 -$48,200.00

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