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 | $ 923,000 | $ 261,000 | $ 410,000 | $ 252,000 |
Variable manufacturing and selling expenses | 479,000 | 118,000 | 204,000 | 157,000 |
Contribution margin | 444,000 | 143,000 | 206,000 | 95,000 |
Fixed expenses: | ||||
Advertising, traceable | 70,100 | 8,800 | 40,400 | 20,900 |
Depreciation of special equipment | 44,100 | 20,900 | 7,300 | 15,900 |
Salaries of product-line managers | 113,800 | 40,500 | 38,200 | 35,100 |
Allocated common fixed expenses* | 184,600 | 52,200 | 82,000 | 50,400 |
Total fixed expenses | 412,600 | 122,400 | 167,900 | 122,300 |
Net operating income (loss) | $ 31,400 | $ 20,600 | $ 38,100 | $ (27,300) |
*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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