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: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 932,000 $ 264,000 $ 409,000 $ 259,000 Variable manufacturing and selling expenses 476,000 114,000 204,000 158,000 Contribution margin 456,000 150,000 205,000 101,000 Fixed expenses: Advertising, traceable 69,400 8,900 40,300 20,200 Depreciation of special equipment 42,700 20,400 7,100 15,200 Salaries of product-line managers 116,100 40,600 38,700 36,800 Allocated common fixed expenses* 186,400 52,800 81,800 51,800 Total fixed expenses 414,600 122,700 167,900 124,000 Net operating income (loss) $ 41,400 $ 27,300 $ 37,100 $ (23,000) *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.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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:

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 932,000	$ 264,000	$ 409,000	$ 259,000
Variable manufacturing and selling expenses	476,000	114,000	204,000	158,000
Contribution margin	456,000	150,000	205,000	101,000
Fixed expenses:
Advertising, traceable	69,400	8,900	40,300	20,200
Depreciation of special equipment	42,700	20,400	7,100	15,200
Salaries of product-line managers	116,100	40,600	38,700	36,800
Allocated common fixed expenses*	186,400	52,800	81,800	51,800
Total fixed expenses	414,600	122,700	167,900	124,000
Net operating income (loss)	$ 41,400	$ 27,300	$ 37,100	$ (23,000)

*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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