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 | $ | 264,000 | $ | 406,000 | $ | 254,000 | ||||
Variable manufacturing and selling expenses | 466,000 | 118,000 | 194,000 | 154,000 | ||||||||
Contribution margin | 458,000 | 146,000 | 212,000 | 100,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 70,600 | 8,700 | 40,900 | 21,000 | ||||||||
Depreciation of special equipment | 43,500 | 20,300 | 7,600 | 15,600 | ||||||||
Salaries of product-line managers | 116,000 | 40,900 | 38,300 | 36,800 | ||||||||
Allocated common fixed expenses* | 184,800 | 52,800 | 81,200 | 50,800 | ||||||||
Total fixed expenses | 414,900 | 122,700 | 168,000 | 124,200 | ||||||||
Net operating income (loss) | $ | 43,100 | $ | 23,300 | $ | 44,000 | $ | (24,200) | ||||
*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.
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