1.

The Regal Cycle Company manufactures three types of bicyclesa 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	$	931,000	$	267,000	$	407,000	$	257,000
Variable manufacturing and selling expenses		471,000		112,000		200,000		159,000
Contribution margin		460,000		155,000		207,000		98,000
Fixed expenses:
Advertising, traceable		69,000		8,200		40,700		20,100
Depreciation of special equipment		43,100		20,400		7,400		15,300
Salaries of product-line managers		115,500		40,400		38,200		36,900
Allocated common fixed expenses*		186,200		53,400		81,400		51,400
Total fixed expenses		413,800		122,400		167,700		123,700
Net operating income (loss)	$	46,200	$	32,600	$	39,300	$	(25,700)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b.

Should production and sale of the racing bikes be discontinued?

	Yes
	No

2a.	Prepare a segmented income statement.

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No

2.

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $33 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

		Per Unit		14,900 Units Per Year
Direct materials	$	9	$	134,100
Direct labor		11		163,900
Variable manufacturing overhead		1		14,900
Fixed manufacturing overhead, traceable		9*		134,100
Fixed manufacturing overhead, allocated		13		193,700
Total cost	$	43	$	640,700

*40% supervisory salaries; 60% depreciation of special equipment (no resale value).

Required:

1a.	Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

1b.

Should the outside suppliers offer be accepted?

	Reject
	Accept

2a.

Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $137,160 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to 2 decimals.)

2b.

Should Troy Engines, Ltd., accept the offer to buy the carburetors for $33 per unit?

	Reject
	Accept

3.

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $97,000 per quarter. The company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	3	per pound		18,000	pounds
B	$	4	per pound		23,000	pounds
C	$	9	per gallon		7,000	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs			Selling Price
A	$	39,000		$	4	per pound
B	$	36,000		$	7	per pound
C	$	12,000		$	12	per gallon

Required:
a.	Compute the incremental profit (loss) for each product.

b.

Which product or products should be sold at the split-off point? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

	Product A
	Product B
	Product C

c.

Which product or products should be processed further? (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.)

Product A

Product B

Product C

The following additional information is available about flight 482:

a.	Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete.
b.	One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decision to drop flight 482.
c.	The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses.
d.	If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
e.	Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.
f.	Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

Required:
1.	Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be indicated by a minus sign.)