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 | $ 931,000 | $ 262,000 | $ 409,000 | $ 260,000 |
Variable manufacturing and selling expenses | 480,000 | 119,000 | 206,000 | 155,000 |
Contribution margin | 451,000 | 143,000 | 203,000 | 105,000 |
Fixed expenses: | ||||
Advertising, traceable | 70,200 | 9,000 | 40,600 | 20,600 |
Depreciation of special equipment | 43,400 | 20,200 | 7,800 | 15,400 |
Salaries of product-line managers | 115,100 | 41,000 | 38,800 | 35,300 |
Allocated common fixed expenses* | 186,200 | 52,400 | 81,800 | 52,000 |
Total fixed expenses | 414,900 | 122,600 | 169,000 | 123,300 |
Net operating income (loss) | $ 36,100 | $ 20,400 | $ 34,000 | $ (18,300) |
*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.
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