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:
TotalDirt BikesMountain BikesRacing BikesSales$ 926,000$ 261,000$ 410,000$ 255,000Variable manufacturing and selling expenses468,000119,000193,000156,000Contribution margin458,000142,000217,00099,000Fixed expenses: Advertising, traceable69,7008,70040,60020,400Depreciation of special equipment43,80020,6007,70015,500Salaries of product-line managers115,20040,80038,70035,700Allocated common fixed expenses*185,20052,20082,00051,000Total fixed expenses413,900122,300169,000122,600Net operating income (loss)$ 44,100$ 19,700$ 48,000$ (23,600)
*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. 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.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started