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 $ 931,000 $266,600 $ 407,000 $ 258,800 457,000 115,000 191,000 151,000 474,000 151,000 216,000 107,600 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) 69,800 8,200 40,600 21,800 42,900 20,260 7,500 15,200 114,900 40,400 38,200 36,300 186,200 53, 2ee 81,400 51,600 413,800 122,000 167,700 124,100 $ 60,200 $ 29,000 $ 48,300 $(17,180) "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 no 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 2 >

Answer 1

1.

Lost contribution margin		- 107,000.00
Fixed costs that can be avoided:
Advertising, traceable	21,000.00
Salary of the product-line manager	36,300.00	57,300.00
Financial (disadvantage) of discontinuing the Racing Bikes		-   49,700.00

2.

No, production and sale of the racing bikes should not be discontinued.

3.

	Total	Dirt Bikes	mountain Bikes	Racing Bikes
Sales	931,000.00	266,000.00	407,000.00	258,000.00
Variable manufacturing and selling expenses	457,000.00	115,000.00	191,000.00	151,000.00
Contribution margin	474,000.00	151,000.00	216,000.00	107,000.00
Traceable fixed expenses:
Advertising, traceable	69,800.00	8,200.00	40,600.00	21,000.00
Depreciation of special equipment	42,900.00	20,200.00	7,500.00	15,200.00
Salaries of the product line managers	114,900.00	40,400.00	38,200.00	36,300.00
Total traceable fixed expenses	227,600.00	68,800.00	86,300.00	72,500.00
Product line segment margin (loss)	246,400.00	82,200.00	129,700.00	34,500.00
Common fixed expenses	186,200.00
Net operating income	60,200.00