2 Exercise 12-2 Dropping or Retaining a Segment [L012-2] 14.28 ycle Company manu

Question

2 Exercise 12-2 Dropping or Retaining a Segment [L012-2] 14.28 ycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and points expenses for the past quarter follow Dirt Bikes Mountain Racing eBook Hint Print References Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $921,000 $263,000 401,000 257,000 474,000 114,000 207,000 153,000 447,000 149,000 194,000194,000 Advertising, traceable 9,500 8,800 4,200 20,500 7,500 15,300 114,100 40,000 38,200 35,900 184,200 52,600 80,200 51,400 166,100 123,100 Net operating income (loss) 35,900 5 27,100 27,900 (19,100) Depreciation of special Salaries of product-line Allocated common fixed 43,300 20,500 equipment managers expenses* Total fixed expenses 411,100 121,900 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? Mc Graw

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 921000 664000 -257000 Variable manufacturing and selling expenses 474000 321000 153000 Contribution margin (loss) 447000 343000 -104000 Fixed expenses: Advertising, traceable 69500 49000 20500 Depreciation on special equipment 43300 43300 0 Salaries of product manager 114100 78200 35900 Common allocated costs 184200 184200 0 Total fixed expenses 411100 354700 56400 Net operating income (loss) 35900 -11700 -47600 Finacial disadvantage $(47600) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 921000 263000 401000 257000 Variable manufacturing and selling expenses 474000 114000 207000 153000 Contribution margin (loss) 447000 149000 194000 104000 Traceable fixed expenses: Advertising, traceable 69500 8800 40200 20500 Depreciation on special equipment 43300 20500 7500 15300 Salaries of product manager 114100 40000 38200 35900 Total traceable fixed expenses 226900 69300 85900 71700 Product line segment margin 220100 79700 108100 32300 Common fixed expenses 184200 Net operating income (loss) 35900

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