The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a moun
ID: 2570348 • 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: Dirt Mountain Racing Bikes Total Bikes Bikes Sales Variable manufacturing and selling $921,000 $264,000 $ 404,000 $ 253,000 152,000 101,000 456,000 111,000 193,000 expenses Contribution margin Fixed expenses: 465,000 153,000 211,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 8,200 20,700 40,200 52,800 411,300 121,900 167,000 68,900 43,800 114,400 184,200 20,300 15,700 35,800 50,600 122,400 $ 53,700 31,100 $ 44,000 $(21,400) 40,400 7,400 38,400 80,800 Total fixed expenses Net operating income (loss) 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 linesExplanation / Answer
1. Financial advantage/(disadvantage) per quarter of discontinuing Racing bikes
Total
Dirt Bikes
Mountain Bikes
Sales
$668,000
$264,000
$404,000
Variable manufacturing & selling expenses
$304,000
111,000
193,000
Contribution margin
$364,000
$153,000
$211,000
Fixed Expenses
Advertising, traceable
$48,600
8,200
40,400
Depreciation of special equipment
$28,100
20,700
7,400
Salaries of product line managers
$78,600
40,200
38,400
Allocated common fixed expenses
$184,200
72,798
111,402
Total Fixed expenses
$339,500
141,898
197,602
Net operating income/(loss)
$24,500
$11,102
$13,398
Financial (disadvantage) per quarter of discontinuing Racing bikes = $ 24500 - $ 53700
= 29,200
Notes: Total common fixed expenses get allocated between Dirt and mountain bikes
Dirt bikes = 184200/668000 x 264000 = 72798
Mountain bikes = 184200/668000 x 404000 = 111402
Depreciation for special equipment for racing bikes has not been charged as the company can sell the equipment as it does not wear out after closing the unit
2. No, the company should not discontinue the production and sell of racing bikes because it will reduce the net operating income due to higher fixed expenses allocation cost
3. Segmented Income Statement
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
$921,000
$264,000
$404,000
$253,000
Variable manufacturing & selling expenses
$456,000
111,000
193,000
152,000
Contribution margin (loss)
$465,000
$153,000
$211,000
$101,000
Traceable fixed expenses:
Advertising
$68,900
8,200
40,400
20,300
Depreciation of special equipment
$43,800
20,700
7,400
15,700
Salaries of product line managers
$114,400
40,200
38,400
35,800
Total traceable fixed expenses
$227,100
69100
86200
71800
Allocated common fixed expenses
$184,200
52,800
80,800
50,600
Total Common Fixed expenses
$184,200
52,800
80,800
50,600
Total fixed expenses
$411,300
$121,900
$167,000
$122,400
Net operating income (loss)
$53,700
$31,100
$44,000
($21,400)
1. Financial advantage/(disadvantage) per quarter of discontinuing Racing bikes
Total
Dirt Bikes
Mountain Bikes
Sales
$668,000
$264,000
$404,000
Variable manufacturing & selling expenses
$304,000
111,000
193,000
Contribution margin
$364,000
$153,000
$211,000
Fixed Expenses
Advertising, traceable
$48,600
8,200
40,400
Depreciation of special equipment
$28,100
20,700
7,400
Salaries of product line managers
$78,600
40,200
38,400
Allocated common fixed expenses
$184,200
72,798
111,402
Total Fixed expenses
$339,500
141,898
197,602
Net operating income/(loss)
$24,500
$11,102
$13,398
Financial (disadvantage) per quarter of discontinuing Racing bikes = $ 24500 - $ 53700
= 29,200
Notes: Total common fixed expenses get allocated between Dirt and mountain bikes
Dirt bikes = 184200/668000 x 264000 = 72798
Mountain bikes = 184200/668000 x 404000 = 111402
Depreciation for special equipment for racing bikes has not been charged as the company can sell the equipment as it does not wear out after closing the unit
2. No, the company should not discontinue the production and sell of racing bikes because it will reduce the net operating income due to higher fixed expenses allocation cost
3. Segmented Income Statement
Total
Dirt Bikes
Mountain Bikes
Racing Bikes
Sales
$921,000
$264,000
$404,000
$253,000
Variable manufacturing & selling expenses
$456,000
111,000
193,000
152,000
Contribution margin (loss)
$465,000
$153,000
$211,000
$101,000
Traceable fixed expenses:
Advertising
$68,900
8,200
40,400
20,300
Depreciation of special equipment
$43,800
20,700
7,400
15,700
Salaries of product line managers
$114,400
40,200
38,400
35,800
Total traceable fixed expenses
$227,100
69100
86200
71800
Allocated common fixed expenses
$184,200
52,800
80,800
50,600
Total Common Fixed expenses
$184,200
52,800
80,800
50,600
Total fixed expenses
$411,300
$121,900
$167,000
$122,400
Net operating income (loss)
$53,700
$31,100
$44,000
($21,400)
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