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 $ 917,000 $ 261,000 $ 404,000 $ 252,000 Variable manufacturing and selling expenses 472,000 116,000 204,000 152,000 Contribution margin 445,000 145,000 200,000 100,000 Fixed expenses: Advertising, traceable 69,700 8,900 40,700 20,100 Depreciation of special equipment 44,100 21,000 7,100 16,000 Salaries of product-line managers 114,500 40,600 38,500 35,400 Allocated common fixed expenses* 183,400 52,200 80,800 50,400 Total fixed expenses 411,700 122,700 167,100 121,900 Net operating income (loss) $ 33,300 $ 22,300 $ 32,900 $ (21,900) *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.
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