The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2533336 • 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:
*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?
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 920,000 $ 267,000 $ 402,000 $ 251,000 Variable manufacturing and selling expenses 458,000 110,000 196,000 152,000 Contribution margin 462,000 157,000 206,000 99,000 Fixed expenses: Advertising, traceable 69,700 8,700 40,600 20,400 Depreciation of special equipment 43,500 20,400 7,300 15,800 Salaries of product-line managers 115,200 40,800 38,400 36,000 Allocated common fixed expenses* 184,000 53,400 80,400 50,200 Total fixed expenses 412,400 123,300 166,700 122,400 Net operating income (loss) $ 49,600 $ 33,700 $ 39,300 $ (23,400)
Explanation / Answer
Solution 1:
Financial disadvantage per quarter on discontinuing the racing bikes = ($42,600)
Incremental Analysis - Regal Cycle - Racing Bikes Particulars Continue Racing Bikes (Alt 1) Discontinue Racing Bikes (Alt2) Financial advantage (disadvantage) of Alternative 2 Sales $251,000.00 $0.00 -$251,000.00 Variable manufacturing and selling expenses $152,000.00 $0.00 -$152,000.00 Contribution Margin $99,000.00 $0.00 -$99,000.00 Fixed Expenses: Advertising Traceable $20,400.00 $0.00 -$20,400.00 Salaries of Product line manager $36,000.00 $0.00 -$36,000.00 Net Income $42,600.00 $0.00 -$42,600.00Related Questions
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