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 Total Bikes Bikes Sales $923,000 $264,000 401,000 258,000 Variable manufacturing and selling expenses 474,000 112,000205,00157,000 196,000 11,969 Contribution margin Fixed expenses: 449,000 152,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 69,000 40,400 8,400 43,500 20,900 115,200 4,700 52,800 412,300 122,800 $ 36,700 29,200 20,200 15, 200 36,300 51,600 123,300 29,800 $(22,300) 7,400 38, 200 80,280 166, 200 184,600o Total fixed expenses Net operating income (loss) 100:2 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.

Explanation / Answer

   Amount in $

1. NET OPERATING INCOME OF THE COMPANY EXCLUDING THE SEGMENT OF RACING BIKES = 59000

LESS: ALLOCATED COMMON FIXED COST OF RACING SEGMENT    = 51600(assuming that all other FC of Racing Segment are avoidable) NOI    =    7400

There is Financial Disadvantage of $ 29300 ( 36700-7400) per quarter of discontinuing the Racing Bilkes Segmant.

?2. No, the production and sale of racing bikes should not be discontinued in order to avoid the financial disadvantage.

3.   

73285

(184600*264000/66500)

111315

(184600*401000/66500)

Particulars Dirt Bikes Mountain Bikes Total Sales 264000 401000 665000 VC 112000 205000 317000 Contribution 152000 196000 348000 FC 70000 86000 156000 Common FC

73285

(184600*264000/66500)

111315

(184600*401000/66500)

184600 Total FC 143285 197315 340600 Net Operating Income 8715 (1315) 7400

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