*Allocated on the basis of sales dollars. Management is concerned about the cont
ID: 2535345 • Letter: #
Question
*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.
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 923,000 $ 267,000 $ 401,000 $ 255,000 Variable manufacturing and selling expenses 470,000 117,000 203,000 150,000 Contribution margin 453,000 150,000 198,000 105,000 Fixed expenses: Advertising, traceable 69,800 8,600 40,500 20,700 Depreciation of special equipment 43,400 20,200 7,500 15,700 Salaries of product-line managers 114,800 40,000 38,700 36,100 Allocated common fixed expenses* 184,600 53,400 80,200 51,000 Total fixed expenses 412,600 122,200 166,900 123,500 Net operating income (loss) $ 40,400 $ 27,800 $ 31,100 $ (18,500)
Explanation / Answer
1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 923000 668000 -255000 Variable manufacturing and selling expenses 470000 320000 150000 Contribution margin (loss) 453000 348000 -105000 Fixed expenses: Advertising, traceable 69800 49100 20700 Depreciation on special equipment 43400 43400 0 Salaries of product manager 114800 78700 36100 Common allocated costs 184600 184600 0 Total fixed expenses 412600 355800 56800 Net operating income (loss) 40400 -7800 -48200 Financial (disadvantage) ($48200) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 923000 267000 401000 255000 Variable manufacturing and selling expenses 470000 117000 203000 150000 Contribution margin (loss) 453000 150000 198000 105000 Traceable fixed expenses: Advertising, traceable 69800 8600 40500 20700 Depreciation on special equipment 43400 20200 7500 15700 Salaries of product manager 114800 40000 38700 36100 Total traceable fixed expenses 228000 68800 86700 72500 Product line segment margin 225000 81200 111300 32500 Common fixed expenses 184600 Net operating income (loss) 40400
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