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: Dirt Mountain Racing Bikes Total Bikes Bikes $921,000 $263,000 $ 403,000 485,000 119,000 207,000 Sales 255,000 159,000 Variable manufacturing and selling expenses Contribution margin Pixed expenses: 436,000 144,000 196,000 96,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 8,400 43,500 20,400 115,500 40,700 52,600 68,900 40,300 7,700 39,000 80,600 412,100 122,100 167,600 20,200 15,400 35,800 51,000 122,400 28,400 $ (26,400) 184,200 Total fixed expenses Net operating income (loss) $ 23,900 21,900 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

total if Difference racing bike Current are 1-a) total dropped Sales 921,000 666000 -255,000 Variable expenses 485,000 326000 159,000 contribution margin (loss) 436,000 340000 -96,000 fixed expenses Advertising,traceable 68,900 48700 20,200 Depreciation on special equipment 43,500 43,500 0 Salaries of product managers 115,500 79700 35,800 common allocated costs 184,200 184,200 0 total fixed expenses 412,100 356100 56,000 Net operating income(loss) 23,900 -16100 -40,000 Net financial disadvantage $40,000 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 921,000 263,000 403,000 255,000 variable manufacturing and selling expense 485,000 119,000 207,000 159,000 contribution margin (loss) 436,000 144,000 196,000 96,000 traceable fixed expenses advertising 68,900 8,400 40,300 20,200 depreciation on special equipment 43,500 20,400 7,700 15,400 salaries of the product line managers 115,500 40,700 39,000 35,800 total traceable fixed expenses 227,900 69,500 87,000 71,400 product line segment margin 208,100 74,500 109,000 24,600 common fixed expenses 184,200 net operating income(loss) 23,900

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