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 $ 934,000 $ 268,000 $ 410,000 $ 256,000 Variable manufacturing and selling expenses 474,000 113,000 207,000 154,000 Contribution margin 460,000 155,000 203,000 102,000 Fixed expenses: Advertising, traceable 69,500 8,800 40,100 20,600 Depreciation of special equipment 43,100 20,600 7,100 15,400 Salaries of product-line managers 115,000 41,000 38,400 35,600 Allocated common fixed expenses* 186,800 53,600 82,000 51,200 Total fixed expenses 414,400 124,000 167,600 122,800 Net operating income (loss) $ 45,600 $ 31,000 $ 35,400 $ (20,800) *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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