Dirt Mountain Racing Total Bikes Bikes Bikes Sales ... $300,000 $90,000 $150,000 $60,000 Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 Contribution margin 180,000 63,000 90,000 27,000 Fixed expenses: Advertising, traceable... Depreciation of special equipment . Salaries of product-line managers. Allocated common fixed expenses". 30,000 10,000 14,000 6,000 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10,000 60,000 18,000 30,000 12,000 Total fixed expenses.. 148,000 46,000 36,000 $ 24,000 $ (9,000) 66,000 Net operating income (loss). $ 32,000 $17,000 "Allocated on the basis of sales dollars.
Dropping or Retaining a Segment
The Regal Cycle 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:
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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