A company manufactures three types of bicycles—a 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 $ 917,000 $ 262,000 $ 404,000 $ 251,000 Variable manufacturing and selling expenses 462,000 116,000 194,000 152,000 Contribution margin 455,000 146,000 210,000 99,000 Fixed expenses: Advertising, traceable 69,700 8,500 41,000 20,200 Depreciation of special equipment 44,300 20,900 7,800 15,600 Salaries of product-line managers 116,000 40,100 39,000 36,900 Allocated common fixed expenses* 183,400 52,400 80,800 50,200 Total fixed expenses 413,400 121,900 168,600 122,900 Net operating income (loss) $ 41,600 $ 24,100 $ 41,400 $ (23,900) *Allocated on the basis of sales dollars. Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Should the production and sale of racing bikes be discontinued?
A company manufactures three types of bicycles—a 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 $ 917,000 $ 262,000 $ 404,000 $ 251,000 Variable manufacturing and selling expenses 462,000 116,000 194,000 152,000 Contribution margin 455,000 146,000 210,000 99,000 Fixed expenses: Advertising, traceable 69,700 8,500 41,000 20,200 Depreciation of special equipment 44,300 20,900 7,800 15,600 Salaries of product-line managers 116,000 40,100 39,000 36,900 Allocated common fixed expenses* 183,400 52,400 80,800 50,200 Total fixed expenses 413,400 121,900 168,600 122,900 Net operating income (loss) $ 41,600 $ 24,100 $ 41,400 $ (23,900) *Allocated on the basis of sales dollars. Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Should the production and sale of racing bikes be discontinued?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
A company manufactures three types of bicycles—a 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 | $ 917,000 | $ 262,000 | $ 404,000 | $ 251,000 |
| Variable manufacturing and selling expenses | 462,000 | 116,000 | 194,000 | 152,000 |
| Contribution margin | 455,000 | 146,000 | 210,000 | 99,000 |
| Fixed expenses: | ||||
| Advertising, traceable | 69,700 | 8,500 | 41,000 | 20,200 |
| 44,300 | 20,900 | 7,800 | 15,600 | |
| Salaries of product-line managers | 116,000 | 40,100 | 39,000 | 36,900 |
| Allocated common fixed expenses* | 183,400 | 52,400 | 80,800 | 50,200 |
| Total fixed expenses | 413,400 | 121,900 | 168,600 | 122,900 |
| Net operating income (loss) | $ 41,600 | $ 24,100 | $ 41,400 | $ (23,900) |
*Allocated on the basis of sales dollars.
Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out.
Required:
- What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
- Should the production and sale of racing bikes be discontinued?
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