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. Sales Total $918, see 460, eee 458,000 Dirt Mountain Racing Bikes Bikes Bikes $265,000 $402,00 $ 251, eee 119,00 191,000 15e,eee 146,099 211,600 101,600 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) 7e, lee 8, 4ee 42,9ee2e,40e 115,800 46,800 183.6ee53eee 412, 4ee 122,6ee 45,688 $ 23,400 $ 41, Beeze, zee 7,2ee 15,3ee 38.000 36.100 se, cee5e, 2ee 167, See 122,3ee 43,5ee $(21,3ee) $ "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? Required 1 Required 2 >

Answer 1

Computation of financial advantage/(disadvantage) of racing bikes:

Contribution from Racing bikes (given)	101000
Less: avoidable fixed cost
Advertising	20700
Salaries of product line managers	36100
Total Financial Advantage	44200

Allocated fixed expenses are unavoidable and Depreciation is sunk costs. Hence both these are unavoidable and donot form a part of decision making.

1. Hence financial advantage if continued is = $ 44200. Hence given question is if discontinued. So disadvantage = ($ 44200)

2. No. Production and Sales of Racing bikes should not be discontinued.

3.

Properly formatted income statement

	Dirt bikes	Mountain bikes	Racing bikes	Total
Sales	265000	402000	251000	918000
Less: Variable Costs	119000	191000	150000	460000
Contribution	146000	211000	101000	458000
Less: Traceable Fixed Costs
Advertising	8400	41000	20700	70100
Salaries of product line managers	40800	38900	36100	115800
Depreciation	20400	7200	15300	42900
Product line margin	76400	123900	28900	229200
Less: Untraceable or Allocated fixed costs				183600
Net operating income				45600