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: Total $ 923,000 465,000 458,000 Dirt Bikes $ 264,000 110,000 154,000 Mountain Bikes $ 402,000 197,000 205,000 Racing Bikes $ 257,000 158,000 99,000 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) 69,500 43,700 114,400 184,600 412,200 $ 45,800 9,000 20,600 40,300 52,800 122,700 $ 31,300 40,200 7,500 38,900 80,400 167,000 $ 38,000 20,300 15,600 35,200 51,400 122,500 $ (23,500) *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. $ 6.00 3.00 1.00 Futura Company purchases the 68,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $12.50 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is opposed to making the starters because the production cost per unit is $12.50 as shown below: Per Unit Total Direct materials Direct labor Supervision 1.70 $ 115,600 Depreciation $ 68,000 Variable manufacturing overhead 0.50 Rent $ 20,400 Total product cost $ 12.50 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $115,600) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $88,000 per period. Depreciation is due to obsolescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 68,000 starters instead of buying them from an outside supplier? 0.30
