The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a moun

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 Racing Bikes Total Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: % 929,000 $267,000 $ 403,000 $.259,000 485,000 120,000 210,000 155,000 104,000 - 444,000 147,000 102? 193,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,700 15,700 36,400 51,800 166,500 124,600 $ 30,600 $ 24,700 $ 26,500 $(20,60e0) 69,200 8,100 43, 200 20, 200 115,200 40,600 185,800 53,40e 413,400 122,300 40,400 7,300 38,200 80,600 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 lines Complete this question by entering your answers in the tabs below.

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 929000 670000 -259000 Variable manufacturing and selling expenses 485000 330000 155000 Contribution margin (loss) 444000 340000 -104000 Fixed expenses: Advertising, traceable 69200 48500 20700 Depreciation on special equipment 43200 43200 0 Salaries of product manager 115200 78800 36400 Common allocated costs 185800 183800 2000 Total fixed expenses 413400 354300 59100 Net operating income (loss) 30600 -14300 -44900 Financial (disadvantage) ($44900) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 929000 267000 403000 259000 Variable manufacturing and selling expenses 485000 120000 210000 155000 Contribution margin (loss) 444000 147000 193000 104000 Traceable fixed expenses: Advertising, traceable 69200 8100 40400 20700 Depreciation on special equipment 43200 20200 7300 15700 Salaries of product manager 115200 40600 38200 36400 Total traceable fixed expenses 227600 68900 85900 72800 Product line segment margin 216400 78100 107100 31200 Common fixed expenses 185800 Net operating income (loss) 30600

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