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 | $ | 925,000 | $ | 265,000 | $ | 403,000 | $ | 257,000 | ||||
Variable manufacturing and selling expenses | 480,000 | 112,000 | 208,000 | 160,000 | ||||||||
Contribution margin | 445,000 | 153,000 | 195,000 | 97,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,600 | 8,300 | 41,000 | 20,300 | ||||||||
Depreciation of special equipment | 44,100 | 20,700 | 7,400 | 16,000 | ||||||||
Salaries of product-line managers | 114,700 | 40,200 | 38,600 | 35,900 | ||||||||
Allocated common fixed expenses* | 185,000 | 53,000 | 80,600 | 51,400 | ||||||||
Total fixed expenses | 413,400 | 122,200 | 167,600 | 123,600 | ||||||||
Net operating income (loss) | $ | 31,600 | $ | 30,800 | $ | 27,400 | $ | (26,600) | ||||
*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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