Question

1 Application 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 Bikes $ 90,00 27. 63. Bee Total $ 300,00 120. 188,eee Mountain Bikes $ 150,00 60. se, ae $ Racing Bikes 60,000 33. 27. eee 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 Incone (los) 30. 23.ee le.ee 6.ee 6.ee 9. le, eee 18, eee 3e, eee "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. References 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 < Prey 4 of 16 Next >

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       3,00,000	$       2,40,000	$         -60,000
	Variable manufacturing and selling expenses	$       1,20,000	$           87,000	$           33,000
	Contribution margin (loss)	$       1,80,000	$       1,53,000	$         -27,000
	Fixed expenses:
	Advertising, traceable	$           30,000	$           24,000	$             6,000
	Depreciation on special equipment	$           23,000	$           23,000	$                    -
	Salaries of product managers	$           35,000	$           25,000	$           10,000
	Allocated common expense	$           60,000	$           60,000	$                    -
	Total fixed expenses	$       1,48,000	$       1,32,000	$           16,000
	Net operating income (loss)	$           32,000	$           21,000	$         -11,000
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       3,00,000	$           90,000	$       1,50,000	$           60,000
	Variable manufacturing and selling expenses	$       1,20,000	$           27,000	$           60,000	$           33,000
	Contribution margin (loss)	$       1,80,000	$           63,000	$           90,000	$           27,000
	Traceable Fixed expenses:
	Advertising, traceable	$           30,000	$           10,000	$           14,000	$             6,000
	Depreciation on special equipment	$           23,000	$             6,000	$             9,000	$             8,000
	Salaries of product managers	$           35,000	$           12,000	$           13,000	$           10,000
	Total traceable fixed expenses	$           88,000	$           28,000	$           36,000	$           24,000
	Product line segment margin (loss)	$           92,000	$           35,000	$           54,000	$             3,000
	Allocated common fixed expense	$           60,000
	Net operating income (loss)	$           32,000

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