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 $ 929,000 $ 264,000 $ 409,000 $ 256,000 Variable manufacturing and selling expenses 463,000 113,000 191,000 159,000 Contribution margin 466,000 151,000 218,000 97,000 Fixed expenses: Advertising, traceable 68,800 8,100 40,200 20,500 Depreciation of special equipment 43,500 20,400 7,100 16,000 Salaries of product-line managers 114,400 40,700 38,200 35,500 Allocated common fixed expenses* 185,800 52,800 81,800 51,200 Total fixed expenses 412,500 122,000 167,300 123,200 Net operating income (loss) $ 53,500 $ 29,000 $ 50,700 $ (26,200) *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	$ 929,000	$ 264,000	$ 409,000	$ 256,000
Variable manufacturing and selling expenses	463,000	113,000	191,000	159,000
Contribution margin	466,000	151,000	218,000	97,000
Fixed expenses:
Advertising, traceable	68,800	8,100	40,200	20,500
Depreciation of special equipment	43,500	20,400	7,100	16,000
Salaries of product-line managers	114,400	40,700	38,200	35,500
Allocated common fixed expenses*	185,800	52,800	81,800	51,200
Total fixed expenses	412,500	122,000	167,300	123,200
Net operating income (loss)	$ 53,500	$ 29,000	$ 50,700	$ (26,200)

*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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