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 $ 926,000 471,000 455,800 Dirt Mountain Bikes Bikes $263,000 $406,999 115,000 199,00€ 148.800 207,889 Racing Bikes $ 257,000 157,800 180,000 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) 68,600 8,300 43,39 20,600 115,200 48,600 185,280 52.609 412,300 122, 100 $ 42,700 $ 25,900 $ 40,100 20,200 7.600 15,180 38,300 36,300 81,280 51,400 167,200 123, 39,800 $(23,880) *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. < Prev 6 of 7 Next > search

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,26,000	$       6,69,000	$     -2,57,000
	Variable manufacturing and selling expenses	$       4,71,000	$       3,14,000	$       1,57,000
	Contribution margin (loss)	$       4,55,000	$       3,55,000	$     -1,00,000
	Fixed expenses:
	Advertising, traceable	$           68,600	$           48,400	$           20,200
	Depreciation on special equipment	$           43,300	$           43,300	$                    -
	Salaries of product managers	$       1,15,200	$           78,900	$           36,300
	Allocated common expense	$       1,85,200	$       1,85,200	$                    -
	Total fixed expenses	$       4,12,300	$       3,55,800	$           56,500
	Net operating income (loss)	$           42,700	$               -800	$         -43,500
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	$       9,26,000	$       2,63,000	$       4,06,000	$       2,57,000
	Variable manufacturing and selling expenses	$       4,71,000	$       1,15,000	$       1,99,000	$       1,57,000
	Contribution margin (loss)	$       4,55,000	$       1,48,000	$       2,07,000	$       1,00,000
	Traceable Fixed expenses:
	Advertising, traceable	$           68,600	$             8,300	$           40,100	$           20,200
	Depreciation on special equipment	$           43,300	$           20,600	$             7,600	$           15,100
	Salaries of product managers	$       1,15,200	$           40,600	$           38,300	$           36,300
	Total traceable fixed expenses	$       2,27,100	$           69,500	$           86,000	$           71,600
	Product line segment margin (loss)	$       2,27,900	$           78,500	$       1,21,000	$           28,400
	Allocated common fixed expense	$       1,85,200
	Net operating income (loss)	$           42,700

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