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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
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 Total $ Bikes Mountain Bikes Racing Bikes $ Sales $ $ 920,000 262,000 403,000 255,000 Variable manufacturing and selling expenses 467,000 117,000 193,000 157,000 Contribution margin 453,000 145,000 210,000 98,000 Fixed expenses: Advertising, traceable 70,000 8,300 *41,000 20,700 Depreciation of special equipment 43,000 20,500 7,300 15,200 Salaries of product- line managers 114,600 40,400 38,800 35,400 Allocated common fixed 184,000 52,400 80,600 51,000 expenses* Total fixed expenses 411,600 121,600 167,700 122,300 Net operating income (loss) $ $ $ 41,400 23,400 $ 42,300 (24,300) "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. Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss) Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 0 0 0 0 0 0 0 $ 0 $ 0 0 $ 0
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