The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a moun
ID: 2472808 • 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 Bikes Mountain Bikes Racing Total Bikes $ 918,000 $ 263,000 $ 401,000 $ 254,000 469,000 115,000197,000 157,000 Sales Variable manufacturing and selling expenses Contribution margirn Fixed expenses 449,000 148,000204,000 97,000 70,000 43,500 115,200 183,600 8,500 20,700 40,400 52,600 40,900 7,200 38,400 80,200 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,600 15,600 36,400 50,800 Total fixed expenses 412,300 122,200166,700 123,400 Net operating income (loss) $ 36,700 25,800 $ 37,300 $ (26,400) 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
1a.
Current Total
Total If Racing Bikes are Dropped
Difference: Net Operating income Increase or Decrease
Contribution margin / (loss)
449,000
352,000
-
Fixed Expenses:
Advertising, traceable
70,000
49,400
-
Depreciation of special equipment
43,500
27,900
-
Salaries of product-line managers
115,200
78,800
-
Allocated common fixed expenses
183,600
183,600
-
-
Total Fixed Expenses
412,300
339,700
Net Operating Income / (loss)
36,700
12,300
(24,400)
1b. No. Because individually racing bike division making losses but as a company whole it will increasing the net operating profits.
2a.
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
918,000
263,000
401,000
254,000
Variable manufacturing and selling expenses
469,000
115,000
197,000
157,000
Contribution margin / (loss)
449,000
148,000
204,000
97,000
Fixed Expenses:
Advertising, traceable
70,000
8,500
40,900
20,600
Depreciation of special equipment
43,500
20,700
7,200
15,600
Salaries of product-line managers
115,200
40,400
38,400
36,400
Allocated common fixed expenses
183,600
52,600
80,200
50,800
Total Fixed Expenses
412,300
122,200
166,700
123,400
Net Operating Income / (loss)
36,700
25,800
37,300
(26,400)
2b.
Yes. When deciding if a company should drop an unprofitable segment, the company should create a segment contribution margin income statement. If the contribution margin is positive, the company should consider direct and common fixed costs, what to do with freed capacity, and the effect on sales of other products.
Current Total
Total If Racing Bikes are Dropped
Difference: Net Operating income Increase or Decrease
Contribution margin / (loss)
449,000
352,000
-
Fixed Expenses:
Advertising, traceable
70,000
49,400
-
Depreciation of special equipment
43,500
27,900
-
Salaries of product-line managers
115,200
78,800
-
Allocated common fixed expenses
183,600
183,600
-
-
Total Fixed Expenses
412,300
339,700
Net Operating Income / (loss)
36,700
12,300
(24,400)
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