3.

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	129,000		$	136,000
Accounts receivable		346,000			477,000
Inventory		569,000			483,000
Plant and equipment, net		796,000			784,000
Investment in Buisson, S.A.		400,000			427,000
Land (undeveloped)		251,000			249,000
Total assets	$	2,491,000		$	2,556,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	330,000
Long-term debt		1,007,000			1,007,000
Stockholders' equity		1,107,000			1,219,000
Total liabilities and stockholders' equity	$	2,491,000		$	2,556,000

Joel de Paris, Inc. Income Statement
Sales					$	5,022,000
Operating expenses						4,369,140
Net operating income						652,860
Interest and taxes:
Interest expense	$	112,000
Tax expense		205,000				317,000
Net income					$	335,860

The company paid dividends of $223,860 last year. The Investment in Buisson, S.A., on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the companys margin, turnover, and return on investment (ROI) for last year. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

3. What was the companys residual income last year?

1.	Average operating assets
2.	Margin		%
	Turnover
	ROI		%
3.	Residual income

4.

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	$	925,000		$	262,000		$	406,000		$	257,000
Variable manufacturing and selling expenses		467,000			113,000			196,000			158,000
Contribution margin		458,000			149,000			210,000			99,000
Fixed expenses:
Advertising, traceable		69,100			8,300			40,300			20,500
Depreciation of special equipment		43,900			20,200			7,900			15,800
Salaries of product-line managers		116,000			40,300			38,900			36,800
Allocated common fixed expenses*		185,000			52,400			81,200			51,400
Total fixed expenses		414,000			121,200			168,300			124,500
Net operating income (loss)	$	44,000		$	27,800		$	41,700		$	(25,500)

*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.

• Required 1
• Required 2
• Required 3

What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

5.

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 $35 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				17,000 Units per Year
Direct materials	$	17		$	289,000
Direct labor		8			136,000
Variable manufacturing overhead		4			68,000
Fixed manufacturing overhead, traceable		6	*		102,000
Fixed manufacturing overhead, allocated		9			153,000
Total cost	$	44		$	748,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?

2. Should the outside suppliers offer be accepted?

3. 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 $170,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside suppliers offer be accepted?

• Required 1
• Required 2
• Required 3
• Required 4

Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?

Financial (disadvantage)