The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2576606 • 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?
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 $ 925,000 $ 264,000 $ 405,000 $ 256,000 Variable manufacturing and selling expenses 465,000 111,000 195,000 159,000 Contribution margin 460,000 153,000 210,000 97,000 Fixed expenses: Advertising, traceable 69,600 8,600 40,100 20,900 Depreciation of special equipment 44,200 20,900 7,500 15,800 Salaries of product-line managers 113,500 40,000 38,400 35,100 Allocated common fixed expenses* 185,000 52,800 81,000 51,200 Total fixed expenses 412,300 122,300 167,000 123,000 Net operating income (loss) $ 47,700 $ 30,700 $ 43,000 $ (26,000)
Explanation / Answer
1-
Total
Racing bike
total if racing bike are dropped
difference: net income increases or decreases
Sales
$
925,000
256,000
669,000
-256,000
Variable manufacturing and selling expenses
465,000
159,000
306,000
159,000
Contribution margin
460,000
97,000
363,000
-97,000
Fixed expenses:
Advertising, traceable
69,600
20,900
48,700
20,900
Depreciation of special equipment
44,200
0
44,200
0
Salaries of product-line managers
113,500
35,100
78,400
35,100
Allocated common fixed expenses*
185,000
0
185,000
0
Total fixed expenses
412,300
56,000
356,300
56,000
Net operating income (loss)
$
47,700
41,000
6,700
-41,000
2- No production and sale of the racing bikes should not be discontinued
3-
Segmented income statement
Total
Dirt
Mountain Bikes
Racing
Bikes
Bikes
Sales
$
925,000
264,000
405,000
256,000
Variable manufacturing and selling expenses
465,000
111,000
195,000
159,000
Contribution margin
460,000
153,000
210,000
97,000
traceable Fixed expenses:
Advertising, traceable
69,600
8,600
40,100
20,900
Depreciation of special equipment
44,200
20,900
7,500
15,800
Salaries of product-line managers
113,500
40,000
38,400
35,100
total of traceable fixed expenses
227,300
69,500
86,000
71,800
Product line segment margin
232,700
83,500
124,000
25,200
Allocated common fixed expenses*
185,000
Net operating income (loss)
47,700
1-
Total
Racing bike
total if racing bike are dropped
difference: net income increases or decreases
Sales
$
925,000
256,000
669,000
-256,000
Variable manufacturing and selling expenses
465,000
159,000
306,000
159,000
Contribution margin
460,000
97,000
363,000
-97,000
Fixed expenses:
Advertising, traceable
69,600
20,900
48,700
20,900
Depreciation of special equipment
44,200
0
44,200
0
Salaries of product-line managers
113,500
35,100
78,400
35,100
Allocated common fixed expenses*
185,000
0
185,000
0
Total fixed expenses
412,300
56,000
356,300
56,000
Net operating income (loss)
$
47,700
41,000
6,700
-41,000
2- No production and sale of the racing bikes should not be discontinued
3-
Segmented income statement
Total
Dirt
Mountain Bikes
Racing
Bikes
Bikes
Sales
$
925,000
264,000
405,000
256,000
Variable manufacturing and selling expenses
465,000
111,000
195,000
159,000
Contribution margin
460,000
153,000
210,000
97,000
traceable Fixed expenses:
Advertising, traceable
69,600
8,600
40,100
20,900
Depreciation of special equipment
44,200
20,900
7,500
15,800
Salaries of product-line managers
113,500
40,000
38,400
35,100
total of traceable fixed expenses
227,300
69,500
86,000
71,800
Product line segment margin
232,700
83,500
124,000
25,200
Allocated common fixed expenses*
185,000
Net operating income (loss)
47,700
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