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 | $ 921,000 | $ 265,000 | $ 401,000 | $ 255,000 |
Variable manufacturing and selling expenses | 460,000 | 112,000 | 193,000 | 155,000 |
Contribution margin | 461,000 | 153,000 | 208,000 | 100,000 |
Fixed expenses: | ||||
Advertising, traceable | 69,500 | 8,100 | 40,800 | 20,600 |
Depreciation of special equipment | 43,400 | 20,300 | 7,400 | 15,700 |
Salaries of product-line managers | 115,200 | 40,900 | 38,900 | 35,400 |
Allocated common fixed expenses* | 184,200 | 53,000 | 80,200 | 51,000 |
Total fixed expenses | 412,300 | 122,300 | 167,300 | 122,700 |
Net operating income (loss) | $ 48,700 | $ 30,700 | $ 40,700 | $ (22,700) |
*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.
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: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) *Allocated on the basis of sales dollars. Total $ 921,000 460,000 461,000 Dirt Bikes $ 265,000 112,000 153,000 Mountain Bikes $ 401,000 193,000 Racing Bikes $ 255,000 155,000 208,000 100,000 69,500 8,100 40,800 20,600 43,400 20,300 7,400 15,700 115,200 40,900 38,900 35,400 184,200 53,000 80,200 51,000 412,300 122,300 167,300 122,700 $ 48,700 $ 30,700 $ 40,700 $ (22,700) 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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