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: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 922,000 $ 269,000 $ 403,000 $ 250,000 Variable manufacturing and selling expenses 477,000 110,000 209,000 158,000 Contribution margin 445,000 159,000 194,000 92,000 Fixed expenses: Advertising, traceable 69,800 9,000 40,400 20,400 Depreciation of special equipment 43,400 20,500 7,500 15,400 Salaries of product-line managers 115,800 40,700 38,400 36,700 Allocated common fixed expenses* 184,400 53,800 80,600 50,000 Total fixed expenses 413,400 124,000 166,900 122,500 Net operating income (loss) $ 31,600 $ 35,000 $ 27,100 $ (30,500) *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.
he 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:
Total | Dirt Bikes |
Mountain Bikes | Racing Bikes |
|||||||||
Sales | $ | 922,000 | $ | 269,000 | $ | 403,000 | $ | 250,000 | ||||
Variable manufacturing and selling expenses | 477,000 | 110,000 | 209,000 | 158,000 | ||||||||
Contribution margin | 445,000 | 159,000 | 194,000 | 92,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,800 | 9,000 | 40,400 | 20,400 | ||||||||
43,400 | 20,500 | 7,500 | 15,400 | |||||||||
Salaries of product-line managers | 115,800 | 40,700 | 38,400 | 36,700 | ||||||||
Allocated common fixed expenses* | 184,400 | 53,800 | 80,600 | 50,000 | ||||||||
Total fixed expenses | 413,400 | 124,000 | 166,900 | 122,500 | ||||||||
Net operating income (loss) | $ | 31,600 | $ | 35,000 | $ | 27,100 | $ | (30,500) | ||||
*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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