Adding and Dropping Product Lines and Other Segments (Please show work, thank yo

Question

Adding and Dropping Product Lines and Other Segments (Please show work, thank you.)

3 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 $926, 000 $270,000 401,000 255,000 Variable manufacturing and selling 472,000 115,000 206, 000 151,000 expenses Contribution margin Fixed expenses: 454,000 155,000 195, 000 104,000 40,400 7, 500 38, 200 80,200 166, 300 69,800 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 20,700 16,000 35,100 51,000 122,800 S 40,300 30, 400 28,700 (18, 800) 8,700 44,400 20, 900 114,300 4,000 54, 000 124,600 185,200 413,700 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 lines

Explanation / Answer

1)

Financial disadvantage from discontinuance = -67000- (-18800) = -67000+18800

                = -48200

Loss has increased by $ 48200 from discontinuance of racing bikes.

2)No,since the loss will increase from discontinuance resulting in decrease of overall income

3)segmented Income statement can be improves by eliminating common fixed cost as it is a overall cost of operating a company which will continue to incur whether any segment is continued or disconinued.

Racing bike if discontinued sales revenue 0 Variable expense 0 contribution margin 0 Less:advertising 0 Depreciation -16000   [since not wear out] salaries 0 Allocated cost -51000 [continue to be allocated to other products since it is common cost] Netincome /(loss) -67000

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