Please answer the following questions: 12-2, 12-3
EXERCISE 12-2 Dropping or Retaining a Segment [L02] 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 ......mmm2584 $300,000 $90,000 $150,000 $60,000 Variable manufacturing and selling expenses ....mmmmmm 120,000 27,000 60,000 33,000 Contribution margin .... .FERRER 180,000 63,000 90.000 27,000 Fixed expenses: Advertising, traceable . 30,000 10,000 14,000 6,000 Depreciation of special equipment .... 23,000 6,000 9,000 8,000 Salaries of product-line managers ....... 35,000 12,000 13,000 10,000 Allocated common fixed expenses" 60,000 18,000 30,000 12,000 Total fixed expenses .....mmmmmmmmmmmmmmmmmmmmm. 148,000 46,000 86,000 36,000 Net operating income (losS) ............. .. $ 32,000 $17,000 $ 24,000 $ (9,000 "Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a recommen dation 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. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.EXERCISE 12-3 Make or Buy a Component [LO3] Troy Engines, Lid., 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 sup- plier has offered to sell one type of carburetor to Troy Engines, Lid., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Lid., has gathered the following information relating to its own cost of producing the carburetor internally: Per 15,000 Units Unit per Year Direct materials ... $14 $210,000 Direct labor .....max 10 150,000 Variable manufacturing overhead..... 3 45,000 Fixed manufacturing overhead, traceable 6* 90,000 Fixed manufacturing overhead, allocated ...... 9 135,000 Total COST ........ $42 $630,000 "One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Chapter 12 Required: 1. Assuming that the company has no alternative use for the facilities that are now being used to produce the carburetors, should the outside supplier's offer be accepted? Show all computations. 2. Suppose that if the carburetors were purchased, Troy Engines, Lid., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Should Troy Engines, Lid., accept the offer to buy the carburetors for $35 per unit? Show all computations
