Question

expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $ 925,000 $261,000 $ 409,000 $ 255,000 464,000 111,000 198,000 155,000 461,000 150,000 211,000 100,000 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) 70,100 8,700 40,700 20,700 44,000 20,600 7,800 15,600 114,000 40,300 38,100 35,600 185,000 52,200 81,800 51,000 413,100 121,800 168,400 122,900 $ 47,900 $ 28,200 $ 42,600 $ (22,900) *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?

Answer 1

In the fixed costs, Advertising costs are traceable and Product line manager's salary can be avoided if the product line is discontinued. Depreciation being sunk costs will not impact our financial decision. Moreover no values are realised by disposal of the special equipment. Hence not relevant. Allocated common fixed expenses will occur even after product line are discontinued. Hence, financial advantage for quarter if racing bikes are continued are as follows:

Sales	255000
Variable costs	155000
Contribution	100,000
Less: Avoidable fixed costs
1. Advertisement	20700
2. Salaries of product line manager	35600
Hence, financial advantage	43700

So, if Racing bikes product line is continued, advantage will be 43700$. That means if Product line is DISCONTINUED, financial DISADVANTAGE will be (43700).