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 | $ | 929,000 | $ | 265,000 | $ | 410,000 | $ | 254,000 | ||||
Variable manufacturing and selling expenses | 474,000 | 117,000 | 206,000 | 151,000 | ||||||||
Contribution margin | 455,000 | 148,000 | 204,000 | 103,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,700 | 8,300 | 40,600 | 20,800 | ||||||||
Depreciation of special equipment | 43,900 | 20,800 | 7,500 | 15,600 | ||||||||
Salaries of product-line managers | 114,800 | 40,300 | 38,100 | 36,400 | ||||||||
Allocated common fixed expenses* | 185,800 | 53,000 | 82,000 | 50,800 | ||||||||
Total fixed expenses | 414,200 | 122,400 | 168,200 | 123,600 | ||||||||
Net operating income (loss) | $ | 40,800 | $ | 25,600 | $ | 35,800 | $ | (20,600) | ||||
*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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