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: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment. Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) *Allocated on the basis of sales dollars. Total $ 928,000 470,000 458,000 69,700 43,400 114,500 185,600 413,200 $ 44,800 Dirt Bikes $ 269,000 119,000 150,000 Mountain Bikes $ 400,000 191,000 209,000 Racing Bikes $ 259,000 160,000 99,000 8,200 40,900 20,600 20,500 7,100 15,800 40,300 38,100 36,100 53,800 80,000 51,800 122,800 166,100 124,300 $ 27,200 $ 42,900 $ (25,300) 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.
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: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment. Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) *Allocated on the basis of sales dollars. Total $ 928,000 470,000 458,000 69,700 43,400 114,500 185,600 413,200 $ 44,800 Dirt Bikes $ 269,000 119,000 150,000 Mountain Bikes $ 400,000 191,000 209,000 Racing Bikes $ 259,000 160,000 99,000 8,200 40,900 20,600 20,500 7,100 15,800 40,300 38,100 36,100 53,800 80,000 51,800 122,800 166,100 124,300 $ 27,200 $ 42,900 $ (25,300) 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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:
Sales
Variable manufacturing and selling expenses
Contribution margin
Fixed expenses:
Advertising, traceable
Depreciation of special equipment
Salaries of product-line managers
Allocated common fixed expenses*
Total fixed expenses
Net operating income (loss).
Total
$928,000
470,000
458,000
69,700
43,400
114,500
185,600
413,200
$ 44,800
Dirt Bikes
$ 269,000
119,000
150,000
8,200
20,500
40,300
53,800
122,800
Mountain
Bikes
$ 400,000
191,000
209,000
Racing Bikes
$ 259,000
160,000
99,000
40,900
20,600
7,100
15,800
38,100
36,100
80,000
166,100
51,800
124,300
$ 27,200 $ 42,900 $ (25,300)
*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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