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 | $ | 924,000 | $ | 266,000 | $ | 401,000 | $ | 257,000 | ||||
Variable manufacturing and selling expenses | 465,000 | 112,000 | 196,000 | 157,000 | ||||||||
Contribution margin | 459,000 | 154,000 | 205,000 | 100,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,400 | 8,400 | 40,800 | 20,200 | ||||||||
Depreciation of special equipment | 44,100 | 20,400 | 7,900 | 15,800 | ||||||||
Salaries of product-line managers | 114,600 | 40,700 | 38,200 | 35,700 | ||||||||
Allocated common fixed expenses* | 184,800 | 53,200 | 80,200 | 51,400 | ||||||||
Total fixed expenses | 412,900 | 122,700 | 167,100 | 123,100 | ||||||||
Net operating income (loss) | $ | 46,100 | $ | 31,300 | $ | 37,900 | $ | (23,100) | ||||
*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? Y or N
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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