The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2535820 • 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?
2. Should the production and sale of racing bikes be discontinued?
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 $ 924,000 $ 268,000 $ 401,000 $ 255,000 Variable manufacturing and selling expenses 476,000 112,000 208,000 156,000 Contribution margin 448,000 156,000 193,000 99,000 Fixed expenses: Advertising, traceable 69,300 8,100 40,600 20,600 Depreciation of special equipment 43,800 20,200 7,900 15,700 Salaries of product-line managers 114,500 40,800 38,400 35,300 Allocated common fixed expenses* 184,800 53,600 80,200 51,000 Total fixed expenses 412,400 122,700 167,100 122,600 Net operating income (loss) $ 35,600 $ 33,300 $ 25,900 $ (23,600)
Explanation / Answer
Solution 1:
Particulars
Current Total
Total If Racing Bikes Are Dropped
Difference: Net Operating Income Increase or (Decrease)
Sales
924,000
669,000
(255,000)
Variable manufacturing and selling expenses
476,000
320,000
156,000
Contribution margin (loss)
448,000
349,000
(99,000)
Fixed expenses:
Advertising, traceable
69,300
48,700
20,600
Depreciation on special equipment
43,800
43,800
0
Salaries of product managers
114,500
79,200
35,300
Common allocated costs
184,800
184,800
0
Total fixed expenses
412,400
356,500
55,900
Net operating income (loss)
35,600
(7,500)
(43,100)
The financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes by Regal Cycle Company is impact on net operating income (loss) is discontinuing operations is $ ($ 43,100).
Solution 2:
No. Because if production and sale of racing bikes be discontinued it would incur operating loss of ($ 43,100).
Solution 3:
Segmented income statement
Particulars
Total ($)
Dirt Bikes ($ )
Mountain Bikes ($)
Racing Bikes ($)
Sales
924,000
268,000
401,000
255,000
Variable manufacturing and selling expenses
476,000
112,000
208,000
156,000
Contribution margin (loss)
448,000
156,000
193,000
99,000
Traceable fixed expenses:
Advertising, traceable
69,300
8,100
40,600
20,600
Depreciation on special equipment
43,800
20,200
7,900
15,700
Salaries of product managers
114,500
40,800
38,400
35,300
Total traceable fixed expenses
227,600
69,100
86,900
71,600
Product line segment margin
220,400
86,900
106,100
27,400
Common fixed expenses
184,800
Net operating income (loss)
35,600
Particulars
Current Total
Total If Racing Bikes Are Dropped
Difference: Net Operating Income Increase or (Decrease)
Sales
924,000
669,000
(255,000)
Variable manufacturing and selling expenses
476,000
320,000
156,000
Contribution margin (loss)
448,000
349,000
(99,000)
Fixed expenses:
Advertising, traceable
69,300
48,700
20,600
Depreciation on special equipment
43,800
43,800
0
Salaries of product managers
114,500
79,200
35,300
Common allocated costs
184,800
184,800
0
Total fixed expenses
412,400
356,500
55,900
Net operating income (loss)
35,600
(7,500)
(43,100)
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