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 $ 929,000 $ 268,000 $ 402,000 $ 259,000 Variable manufacturing and selling expenses 461,000 116,000 192,000 153,000 Contribution margin 468,000 152,000 210,000 106,000 Fixed expenses: Advertising, traceable 70,300 8,700 40,700 20,900 Depreciation of special equipment 43,700 20,800 7,800 15,100 Salaries of product-line managers 114,700 40,500 38,600 35,600 Allocated common fixed expenses* 185,800 53,600 80,400 51,800 Total fixed expenses 414,500 123,600 167,500 123,400 Net operating income (loss) $ 53,500 $ 28,400 $ 42,500 $ (17,400) *Allocated based on sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants to decide whether 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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