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:

*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 Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 920,000 $ 262,000 $ 403,000 $ 255,000 Variable manufacturing and selling expenses 459,000 112,000 191,000 156,000 Contribution margin 461,000 150,000 212,000 99,000 Fixed expenses: Advertising, traceable 70,000 8,900 41,000 20,100 Depreciation of special equipment 43,500 20,600 7,400 15,500 Salaries of product-line managers 115,400 40,100 38,300 37,000 Allocated common fixed expenses* 184,000 52,400 80,600 51,000 Total fixed expenses 412,900 122,000 167,300 123,600 Net operating income (loss) $ 48,100 $ 28,000 $ 44,700 $ (24,600)

Explanation / Answer

1 Total Total without Racing Bikes Difference Sales 920000 665000 -255000 Variable manufacturing and selling expenses    459000 303000 156000 Contribution margin 461000 362000 -99000 Fixed expenses: Advertising, traceable 70000 49900 20100 Depreciation of special equipment 43500 43500 0 Salaries of product-line managers 115400 78400 37000 Allocated common fixed expenses 184000 184000 0 Total fixed expenses 412900 355800 57100 Net operating income (loss) 48100 6200 -41900 2 No, production and sale of racing bikes should not be discontinued 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 920000 262000 403000 255000 Variable manufacturing and selling expenses    459000 112000 191000 156000 Contribution margin 461000 150000 212000 99000 Traceable Fixed expenses: Advertising, traceable 70000 8900 41000 20100 Depreciation of special equipment 43500 20600 7400 15500 Salaries of product-line managers 115400 40100 38300 37000 Total Traceable Fixed expenses 228900 69600 86700 72600 Segment margin 232100 80400 125300 26400 Allocated common fixed expenses 184000 Net operating income (loss) 48100

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.