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 $ 269,000 $ 407,000 $ 253,000 Variable manufacturing and selling expenses 468,000 115,000 196,000 157,000 Contribution margin 461,000 154,000 211,000 96,000 Fixed expenses: Advertising, traceable 70,200 9,000 40,500 20,700 Depreciation of special equipment 43,500 20,500 7,300 15,700 Salaries of product-line managers 114,500 40,200 38,400 35,900 Allocated common fixed expenses* 185,800 53,800 81,400 50,600 Total fixed expenses 414,000 123,500 167,600 122,900 Net operating income (loss) $ 47,000 $ 30,500 $ 43,400 $ (26,900) *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. A. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? B. Should the production and sale of racing bikes be discontinued? C. 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	$ 929,000	$ 269,000	$ 407,000	$ 253,000
Variable manufacturing and selling expenses	468,000	115,000	196,000	157,000
Contribution margin	461,000	154,000	211,000	96,000
Fixed expenses:
Advertising, traceable	70,200	9,000	40,500	20,700
Depreciation of special equipment	43,500	20,500	7,300	15,700
Salaries of product-line managers	114,500	40,200	38,400	35,900
Allocated common fixed expenses*	185,800	53,800	81,400	50,600
Total fixed expenses	414,000	123,500	167,600	122,900
Net operating income (loss)	$ 47,000	$ 30,500	$ 43,400	$ (26,900)

*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.

A. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

B. Should the production and sale of racing bikes be discontinued?

C. 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)
Total
$ 929,000
468,000
461,000
78,200
43,500
Contribution margin (loss)
Traceable fixed expenses:
114,500
185,800
414,000
$ 47,000
Should the production and sale of racing bikes be discontinued?
Yes
No
Total traceable fixed expenses
Product line segment margin (loss)
Net operating income (loss)
Dirt Bikes
$ 269,000
115,000
154,000
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
Financiall advantage (disadvantage) per quarter
Totals
*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.
0
9,000
20,500
40,200
53,800
123,500
$ 30,500
0
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.
0
0 $
Mountain
Bikes
$ 407,000
196,000
211,000
40,580
7,380
38,480
81,400
167,600
$ 43,400
Racing Bikes
$ 253,000
157,000
96,000
D
0
0 $
Dirt Bikes Mountain Bikes Racing Bikes
20,700
15,700
35,908
50,600
122,900
$ (26,900)
0
0
0
$
0
0
0

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