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 Sales $ 922,000 $264,000 $ 402,000 $ 256,000 Variable manufacturing and selling expenses_ 462,000 120,000 190,000 152,000 Contribution margin 460,000 144,000 212,000 104,000 Fixed expenses: Advertising, traceable 69,700 8,200 40,800 20,700 Depreciation of special equipment 43,100 20,300 7,200 15,600 Salaries of product-line managers 115,100 40,700 38,700 35,700 Allocated common fixed expenses 184,400 52,800 80,400 51,200 Total fixed expenses 412,300 122,000 167,100 123,200 Net operating income (loss) $ 47,700 $ 22,000 $ 44,900 $(19,200) *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.

Answer 1

Hi

Let me know in case you face any issue:

Answers are highlighted in yellow: Solution: Format and Naming convention is not available, can be slightly different: 1)Particulars Loss of contribution margin Less: Avoidable fixed cost: Advertisement Salary of product line Managers Financial Disadvantage per Quarter Sign of amount can be nagative or positive as per question requirement. Racing -104000 $20,700 $35,700 $ -47,600 Sign can be +/- Because, it will reduce the net income by $47,600. 2) NO 3) Naming is not available, can be slightly different: Particulars Mountain Dirt Racing Total Sales 402000 922000 264000 256000 Variable manufacturing and selling Exp. Contribution Margin (Loss) 462000 120000 190000 152000 460000 144000 212000 104000 Traceable Fixed Expenses: Advertising, traceable $69,700 $ 8,200 $ 43,100 $20,300 $ 40,800 $ 7,200 $ 20,700 Depreciation of special equipment Salaries of product line managers Total Traceable Fixed Expenses Product line segment margin(loss) Common (or Organizational) Fixed Exp Net Operating Income (loss) 15,600 115100 $ 40,700 $ 227900 69,200 $ 232100 $ 74,800 38,700 $ 35,700 86,700 $ 125300 $ 72,000 32,000 184400 $ 47,700