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 | $ 928,000 | $ 264,000 | $ 409,000 | $ 255,000 |
Variable manufacturing and selling expenses | 464,000 | 112,000 | 196,000 | 156,000 |
Contribution margin | 464,000 | 152,000 | 213,000 | 99,000 |
Fixed expenses: | ||||
Advertising, traceable | 69,300 | 8,200 | 40,200 | 20,900 |
Depreciation of special equipment | 44,100 | 20,900 | 7,300 | 15,900 |
Salaries of product-line managers | 114,300 | 40,600 | 38,100 | 35,600 |
Allocated common fixed expenses* | 185,600 | 52,800 | 81,800 | 51,000 |
Total fixed expenses | 413,300 | 122,500 | 167,400 | 123,400 |
Net operating income (loss) | $ 50,700 | $ 29,500 | $ 45,600 | $ (24,400) |
*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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