The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a moun
ID: 2436505 • Letter: T
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: Racing Dirt Bikes Mountain Total 483,000 451,000 152,000 Bikes 208,000 197,000 Bikes 158,000 102,000 Sales $934,000 $ 269,000 $ 405,000$ 260,000 Variable manufacturing and selling expenses Contribution margin Fixed expenses 117,000 69,000 43,600 115,500 186,800 8,200 20,800 40,900 53,800 20,500 15,500 36,100 52,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,300 7,300 38,500 81,000 Total fixed expenses 414,900 123,700 167,100 124,100 Net operating income (loss) $ 36,100 $ 28,300 $ 29,900 $ (22,100) 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 outExplanation / Answer
Answer:
1
Current
Total
Total if racing bike
drop
Difference in net
operating income
Increase or(decrease)
Sales
934000
674,000
-260,000
Variable manufacturing and selling expenses
483000
325,000
158,000
0
Contribution margin
451000
349000
-102,000
Fixed expenses:
Advertising, traceable
69000
48,500
20,500
Depreciation of special equipment
43600
43,600
0
Salaries of product-line managers
115500
79,400
36,100
Allocated common fixed expenses*
186800
186,800
0
Total fixed expenses
414900
358300
56600
Net operating income (loss)
36100
-9300
-45,400
1-b
Should production and sale of the racing bikes be discontinued?
Answer: NO , the racing bikes should not be discontinued.
2
Prepare a segmented income statement.
Total
Dirt
Mountain
Racing
Bikes
Bikes
Bikes
Sales
934,000
269,000
405000
260,000
Variable manufacturing and selling expenses
483,000
117,000
208000
158,000
Contribution margin
451,000
152,000
197,000
102,000
Traceable Fixed expenses:
Advertising, traceable
69,000
8,200
40300
20,500
Depreciation of special equipment
43,600
20,800
7300
15,500
Salaries of product-line managers
115,500
40,900
38500
36,100
Total Traceable fixed cost
228,100
69,900
86,100
72,100
Segment Margin
222,900
82,100
110,900
29,900
Allocated common fixed expenses*
186800
Net operating income (loss)
36,100
2-b
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
Answer: Yes
Current
Total
Total if racing bike
drop
Difference in net
operating income
Increase or(decrease)
Sales
934000
674,000
-260,000
Variable manufacturing and selling expenses
483000
325,000
158,000
0
Contribution margin
451000
349000
-102,000
Fixed expenses:
Advertising, traceable
69000
48,500
20,500
Depreciation of special equipment
43600
43,600
0
Salaries of product-line managers
115500
79,400
36,100
Allocated common fixed expenses*
186800
186,800
0
Total fixed expenses
414900
358300
56600
Net operating income (loss)
36100
-9300
-45,400
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