Question
Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 923,000 $ 267,000 $ 401,000 $ 255,000 Variable manufacturing and selling expenses 470,000 117,000 203,000 150,000
Total | Dirt Bikes | Mountain Bikes | Racing Bikes | |||||||||
Sales | $ | 923,000 | $ | 267,000 | $ | 401,000 | $ | 255,000 | ||||
Variable manufacturing and selling expenses | 470,000 | 117,000 | 203,000 | 150,000 | ||||||||
Contribution margin | 453,000 | 150,000 | 198,000 | 105,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,800 | 8,600 | 40,500 | 20,700 | ||||||||
Depreciation of special equipment | 43,400 | 20,200 | 7,500 | 15,700 | ||||||||
Salaries of product-line managers | 114,800 | 40,000 | 38,700 | 36,100 | ||||||||
Allocated common fixed expenses* | 184,600 | 53,400 | 80,200 | 51,000 | ||||||||
Total fixed expenses | 412,600 | 122,200 | 166,900 | 123,500 | ||||||||
Net operating income (loss) | $ | 40,400 | $ | 27,800 | $ | 31,100 | $ | (18,500) | ||||
*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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