Hel Exercise 12-2 Dropping or Retaining a Segment (L012-2) The Regal Cycle Compa

Question

Hel Exercise 12-2 Dropping or Retaining a Segment (L012-2) 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 ntain Racing Tota $300,000 $90,00o $150,000 60,000 Sales Variable manufacturing and selling expenses Contribution margin 120,000 27,000 60,00033,000 90,000 27,000 180,000 63.000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 23,000 6,000 60,000 18,000 148,00046,00066,000 32,000 17,00o 24,000 (9,000) 30,000 10,000 14,000 6,000 8,000 35,000 12,000 13,000 10,000 30,000 12.000 6.000 9,000 Total fixed expenses 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 Pr discontinuet would be Prev 1016 ?? Next >

Explanation / Answer

Solution 1:

Solution 2:

As there is net financial disadvantage fo $11,000 on discontinuing racing bike, therefore same should not be discontinued

Solution 3:

Incremental Analysis - Regal Cycle - Racing Bikes Particulars Current total Total if racing bikes are dropped Difference: Net operating income increase (Decrease) Sales $300,000.00 $240,000.00 -$60,000.00 Variable manufacturing and selling expenses $120,000.00 $87,000.00 -$33,000.00 Contribution Margin $180,000.00 $153,000.00 -$27,000.00 Fixed Expenses: Advertising Traceable $30,000.00 $24,000.00 -$6,000.00 Depreciation on special equipment $23,000.00 $23,000.00 $0.00 Salaries of Product line manager $35,000.00 $25,000.00 -$10,000.00 Allocated common fixed expenses $60,000.00 $60,000.00 $0.00 Total fixed expenses $148,000.00 $132,000.00 -$16,000.00 Net Income $32,000.00 $21,000.00 -$11,000.00

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