Question
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
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 | $ 923,000 | $ 265,000 | $ 403,000 | $ 255,000 |
Variable manufacturing and selling expenses | 466,000 | 114,000 | 192,000 | 160,000 |
Contribution margin | 457,000 | 151,000 | 211,000 | 95,000 |
Fixed expenses: | ||||
Advertising, traceable | 70,200 | 8,800 | 40,900 | 20,500 |
Depreciation of special equipment | 42,800 | 20,100 | 7,400 | 15,300 |
Salaries of product-line managers | 115,700 | 40,300 | 38,700 | 36,700 |
Allocated common fixed expenses* | 184,600 | 53,000 | 80,600 | 51,000 |
Total fixed expenses | 413,300 | 122,200 | 167,600 | 123,500 |
Net operating income (loss) | $ 43,700 | $ 28,800 | $ 43,400 | $ (28,500) |
*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.
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