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 | $ 925,000 | $ 264,000 | $ 401,000 | $ 260,000 |
Variable manufacturing and selling expenses | 468,000 | 118,000 | 197,000 | 153,000 |
Contribution margin | 457,000 | 146,000 | 204,000 | 107,000 |
Fixed expenses: | ||||
Advertising, traceable | 70,200 | 8,800 | 40,400 | 21,000 |
Depreciation of special equipment | 43,300 | 20,200 | 7,300 | 15,800 |
Salaries of product-line managers | 114,600 | 41,000 | 38,300 | 35,300 |
Allocated common fixed expenses* | 185,000 | 52,800 | 80,200 | 52,000 |
Total fixed expenses | 413,100 | 122,800 | 166,200 | 124,100 |
Net operating income (loss) | $ 43,900 | $ 23,200 | $ 37,800 | $ (17,100) |
*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?
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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