Question
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 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: 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 $ 925,000 478,000 447,000 Dirt Bikes $ 266,000 117,000 149,000 Mountain Bikes $ 408,000 205,000 Racing Bikes $ 251,000 156,000 203,000 95,000 70,300 8,400 41,000 20,900 43,900 20,400 7,600 15,900 114,600 40,300 38,600 35,700 185,000 413,800 53,200 122,300 81,600 50,200 168,800 $ 33,200 $ 26,700 $ 34,200 122,700 $ (27,700) 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
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