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 $ 933,000 $ 267,000 $ 410,000 $ 256,000 Variable manufacturing and selling expenses 481,000 118,000 205,000 158,000 Contribution margin 452,000 149,000 205,000 98,000 Fixed expenses: Advertising, traceable 70,700 8,900 40,900 20,900 Depreciation of special equipment 42,900 20,500 7,200 15,200 Salaries of product-line managers 113,900 40,300 38,200 35,400 Allocated common fixed expenses* 186,600 53,400 82,000 51,200 Total fixed expenses 414,100 123,100 168,300 122,700 Net operating income (loss) $ 37,900 $ 25,900 $ 36,700 $ (24,700) *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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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	$ 933,000	$ 267,000	$ 410,000	$ 256,000
Variable manufacturing and selling expenses	481,000	118,000	205,000	158,000
Contribution margin	452,000	149,000	205,000	98,000
Fixed expenses:
Advertising, traceable	70,700	8,900	40,900	20,900
Depreciation of special equipment	42,900	20,500	7,200	15,200
Salaries of product-line managers	113,900	40,300	38,200	35,400
Allocated common fixed expenses*	186,600	53,400	82,000	51,200
Total fixed expenses	414,100	123,100	168,300	122,700
Net operating income (loss)	$ 37,900	$ 25,900	$ 36,700	$ (24,700)

*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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