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 Bikes Mountain Racing Total Bikes Bikes Sales Variable manufacturing and selling 915, 000 $262,000 $ 403,000 250,000 465,000 116,000 190,000 159,000 expenses Contribution margin Fixed expenses: 450,000 146,000 213,000 91,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,900 15,200 35,400 50,000 121,500 $ 38,700 23,300 $ 45,900 (30,500) 40,300 7,600 38,600 80,600 411,300 122,700 167,100 8,900 43,800 21, 000 114,400 40,400 183,000 52,400 70,100 Total fixed expenses Net operating income (loss) 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-rurn profitability of the various product lines. Complete this question by entering your answers in the tabs below. Required 1Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 1 Required 2
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 Dirt Bikes Mountain Bikes Racing Bikes Sales $ 915,000 $ 262,000 $ 403,000 $ 250,000 Variable manufacturing and selling expenses 465,000 116,000 190,000 159,000 Contribution margin 450,000 146,000 213,000 91,000 Fixed expenses: Advertising, traceable 70,100 8,900 40,300 20,900 Depreciation of special equipment 43,800 21,000 7,600 15,200 Salaries of product-line managers 114,400 40,400 38,600 35,400 Allocated common fixed expenses* 183,000 52,400 80,600 50,000 Total fixed expenses 411,300 122,700 167,100 121,500 Net operating income (loss) $ 38,700 $ 23,300 $ 45,900 $ (30,500)

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				915,000	665000	-250,000
	Variable expenses				465,000	306000	159,000
	contribution margin (loss)				450,000	359000	-91,000
	fixed expenses
	Advertising,traceable				70,100	49200	20,900
	Depreciation on special equipment				43,800	43,800	0
	Salaries of product managers				114,400	79000	35,400
	common allocated costs				183,000	183,000	0
	total fixed expenses				411,300	355000	56,300
	Net operating income(loss)				38,700	4000	-34,700
	Net financial disadvantage			$34,700
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				915,000	262,000	403,000	250,000
	variable manufacturing and selling expense				465,000	116,000	190,000	159,000
	contribution margin (loss)				450,000	146,000	213,000	91,000
	traceable fixed expenses
	advertising				70,100	8,900	40,300	20,900
	depreciation on special equipment				43,800	21,000	7,600	15,200
	salaries of the product line managers				114,400	40,400	38,600	35,400
	total traceable fixed expenses				228,300	70,300	86,500	71,500
	product line segment margin				221,700	75,700	126,500	19,500
	common fixed expenses				183,000
	net operating income(loss)				38,700
2b)	yes