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 Dirt Mountain Racing Total Bikes Bikes Bikes $922,000 $265,000 $ 403,000 $ 254,000 474,000 120,000 204,000 150,000 448,000 145,000 199,000 104,000 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) 69,600 43,480 8,900 20,200 40,200 7,800 20,500 15,400 115,200 40,400 38,100 36,700 80,600 50,800 184,400 53,000 412,680 122,580 $ 35,400 $ 22,500 $ 166, 700 123,400 32,300 $(19,400) *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 < Prev 2 of 7 !!! Next >

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	922000	668000	-254000
Variable manufacturing and selling expenses	474000	324000	150000
Contribution margin (loss)	448000	344000	-104000
Fixed expenses:
Advertising, traceable	69600	49100	20500
Depreciation on special equipment	43400	43400	0
Salaries of product manager	115200	78500	36700
Common allocated costs	184400	184400	0
Total fixed expenses	412600	355400	57200
Net operating income (loss)	35400	-11400	-46800
Financial (disadvantage) $(46800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922000	265000	403000	254000
Variable manufacturing and selling expenses	474000	120000	204000	150000
Contribution margin (loss)	448000	145000	199000	104000
Traceable fixed expenses:
Advertising, traceable	69600	8900	40200	20500
Depreciation on special equipment	43400	20200	7800	15400
Salaries of product manager	115200	40400	38100	36700
Total traceable fixed expenses	228200	69500	86100	72600
Product line segment margin	219800	75500	112900	31400
Common fixed expenses	184400
Net operating income (loss)	35400