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 $ 922,000 472,000 450,000 Dirt Mountain Racing Bikes Bikes Bikes $263,00 $ 405,000 $ 254, eee 111,eee 209.eee 152,eee 152,200 196,eee 182.eee 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 43,400 115,600 184,400 413.000 37,800 8,182 40,600 20,9ee 20,782 7,300 15,4ee 40,5ee38,200 36,900 52,6ee 8 1, 50,888 121,90e 167, 100 124, eee $ 39,18 $ 28,900 $(22, eee) $ "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.

Answer 1

1.Financial Advantage/(Disadvantage)of discontinuing the racing bikes = Fixed costs saved – Contribution Margin lost
=56700-102000
= $(45,300)
Depreciation is sunk cost and allocation fixed expenses are not relevant
3
	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922,000	263,000	405,000	254,000
Less: Variable Costs	472,000	111,000	209,000	152,000
Contribution Margin (loss)	450,000	152,000	196,000	102,000
Traceable Fixed Expenses:
Advertising	69,600	8,100	40,600	20,900
Depreciation	43,400	20,700	7,300	15,400
Salaries	115,600	40,500	38,200	36,900
Total traceable fixed expenses	228,600	69,300	86,100	73,200
Product line segment margin (loss)	221,400	82,700	109,900	28,800
Common Fixed Expenses	184,400
Net Operating income (loss)	37,000