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	$	919,000		$	261,000		$	406,000		$	252,000
Variable manufacturing and selling expenses		474,000			119,000			198,000			157,000
Contribution margin		445,000			142,000			208,000			95,000
Fixed expenses:
Advertising, traceable		69,900			8,400			40,500			21,000
Depreciation of special equipment		43,800			20,900			7,600			15,300
Salaries of product-line managers		114,600			40,700			38,300			35,600
Allocated common fixed expenses*		183,800			52,200			81,200			50,400
Total fixed expenses		412,100			122,200			167,600			122,300
Net operating income (loss)	$	32,900		$	19,800		$	40,400		$	(27,300)

*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.

B

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

	Per Unit		22,000 Units Per Year
Direct materials	$	15		$	330,000
Direct labor		8			176,000
Variable manufacturing overhead		3			66,000
Fixed manufacturing overhead, traceable		3	*		66,000
Fixed manufacturing overhead, allocated		6			132,000
Total cost	$	35		$	770,000

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 22,000 carburetors from the outside supplier?

2. Should the outside supplier's offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $220,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 22,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted?

C

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $350,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price	Quarterly Output
A	$	20.00	per pound		13,000	pounds
B	$	14.00	per pound		20,300	pounds
C	$	26.00	per gallon		4,200	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs	Selling Price
A	$	70,950	$	25.10	per pound
B	$	101,905	$	20.10	per pound
C	$	43,780	$	34.10	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

D

Kristen Lu purchased a used automobile for $26,800 at the beginning of last year and incurred the following operating costs:

Depreciation ($26,800 5 years)	$	5,360
Insurance	$	2,800
Garage rent	$	1,500
Automobile tax and license	$	740
Variable operating cost	$	0.09	per mile

The variable operating cost consists of gasoline, oil, tires, maintenance, and repairs. Kristen estimates that, at her current rate of usage, the car will have zero resale value in five years, so the annual straight-line depreciation is $5,360. The car is kept in a garage for a monthly fee.

Required:

1. Kristen drove the car 26,000 miles last year. Compute the average cost per mile of owning and operating the car.(Round your answers to 2 decimal places.)

2. Kristen is unsure about whether she should use her own car or rent a car to go on an extended cross-country trip for two weeks during spring break. What costs above are relevant in this decision?(You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

check all that apply

• Variable operating costs
• Depreciation
• Automobile tax
• License costs
• Insurance costs