The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a moun
ID: 2437460 • 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: Dirt Mountain Racing Bikes Total Bikes Bikes Sales Variable manufacturing and selling $ 929,000 $268,000 402,000 $ 259,000 482,000 116,000 207,000 159,000 100,000 expenses 447,000 152,000 195, 000 Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,400 15,500 36,300 51,800 124,000 $ 33,000 29,500 27,500 $(24,000) 40,400 7,900 38,800 80,400 414,000 122,500 167,500 69,200 43,700 115, 300 185,800 8,400 20,300 40, 200 53,600 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. 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 linesExplanation / Answer
Answer:
1
Current
Total if racing bike
Difference in net
Total
drop
operating income
Increase or(decrease)
Sales
929000
670,000
-259,000
Variable manufacturing and selling expenses
482000
323,000
159,000
0
Contribution margin
447000
347000
-100,000
Fixed expenses:
Advertising, traceable
69200
48,800
20,400
Depreciation of special equipment
43700
43,700
0
Salaries of product-line managers
115300
79,000
36,300
Allocated common fixed expenses*
185800
185,800
0
Total fixed expenses
414000
357300
56700
Net operating income (loss)
33000
-10300
-43,300
2
Should production and sale of the racing bikes be discontinued?
Answer: NO , the racing bikes should not be discontinued.
3
segmented income statement
Total
Dirt
Mountain
Racing
Bikes
Bikes
Bikes
Sales
929,000
268,000
402000
259,000
Variable manufacturing and selling expenses
482,000
116,000
207000
159,000
Contribution margin
447,000
152,000
195,000
100,000
Traceable Fixed expenses:
Advertising, traceable
69,200
8,400
40400
20,400
Depreciation of special equipment
43,700
20,300
7900
15,500
Salaries of product-line managers
115,300
40,200
38800
36,300
Total Traceable fixed cost
228,200
68,900
87,100
72,200
Segment Margin
218,800
83,100
107,900
27,800
Allocated common fixed expenses
185800
Net operating income (loss)
33,000
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 if racing bike
Difference in net
Total
drop
operating income
Increase or(decrease)
Sales
929000
670,000
-259,000
Variable manufacturing and selling expenses
482000
323,000
159,000
0
Contribution margin
447000
347000
-100,000
Fixed expenses:
Advertising, traceable
69200
48,800
20,400
Depreciation of special equipment
43700
43,700
0
Salaries of product-line managers
115300
79,000
36,300
Allocated common fixed expenses*
185800
185,800
0
Total fixed expenses
414000
357300
56700
Net operating income (loss)
33000
-10300
-43,300
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