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 | $ | 922,000 | $ | 263,000 | $ | 403,000 | $ | 256,000 | ||||
Variable manufacturing and selling expenses | 472,000 | 116,000 | 201,000 | 155,000 | ||||||||
Contribution margin | 450,000 | 147,000 | 202,000 | 101,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,100 | 8,500 | 40,300 | 20,300 | ||||||||
Depreciation of special equipment | 43,200 | 20,300 | 7,800 | 15,100 | ||||||||
Salaries of product-line managers | 115,700 | 40,000 | 38,900 | 36,800 | ||||||||
Allocated common fixed expenses* | 184,400 | 52,600 | 80,600 | 51,200 | ||||||||
Total fixed expenses | 412,400 | 121,400 | 167,600 | 123,400 | ||||||||
Net operating income (loss) | $ | 37,600 | $ | 25,600 | $ | 34,400 | $ | (22,400) | ||||
*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:
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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