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: Total $ 915, 000 Dirt Bikes $ 261, 000 119,000 142, 000 Mountain Bikes $ 400, 000 208,000 192, 000 Racing Bikes $ 254, 000 154, 000 100,000 434, 000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 70, 200 42, 800 115, 300 183, 000 411, 300 22,700 9,000 20, 500 40, 500 52, 200 122, 200 $ 19, 800 40, 700 7, 100 38, 800 80,000 166, 600 25, 400 20, 500 15, 200 36,000 50, 800 122, 500 $ 22,500) $ $ "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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes? Financial (disadvantage) per quarterſ

Answer 1

						total if	Difference
						racing bike
					Current	are
1)					total	dropped
	Sales				915,000	661000	-254,000
	Variable expenses				481,000	327000	154,000
	contribution margin (loss)				434,000	334000	-100,000
	fixed expenses
	Advertising,traceable				70,200	49700	20,500
	Depreciation on special equipment				42,800	42,800	0
	Salaries of product managers				115,300	79300	36,000
	common allocated costs				183,000	183,000	0
	total fixed expenses				411,300	354800	56,500
	Net operating income(loss)				22,700	-20800	-43,500
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				915,000	261,000	400,000	254,000
	variable manufacturing and selling expense				481,000	119,000	208,000	154,000
	contribution margin (loss)				434,000	142,000	192,000	100,000
	traceable fixed expenses
	advertising				70,200	9,000	40,700	20,500
	depreciation on special equipment				42,800	20,500	7,100	15,200
	salaries of the product line managers				115,300	40,500	38,800	36,000
	total traceable fixed expenses				228,300	70,000	86,600	71,700
	product line segment margin				205,700	72,000	105,400	28,300
	common fixed expenses				183,000
	net operating income(loss)				22,700