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 $ 923,000 $ 266,000 $ 404,000 $ 253,000 Variable manufacturing and selling expenses 482,000 120,000 203,000 159,000 Contribution margin 441,000 146,000 201,000 94,000 Fixed expenses: Advertising, traceable 69,400 8,300 41,000 20,100 Depreciation of special equipment 44,000 20,400 7,800 15,800 Salaries of product-line managers 114,200 40,500 38,600 35,100 Allocated common fixed expenses* 184,600 53,200 80,800 50,600 Total fixed expenses 412,200 122,400 168,200 121,600 Net operating income (loss) $ 28,800 $ 23,600 $ 32,800 $ (27,600) *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	$	923,000		$	266,000	$	404,000	$	253,000
Variable manufacturing and selling expenses		482,000			120,000		203,000		159,000
Contribution margin		441,000			146,000		201,000		94,000
Fixed expenses:
Advertising, traceable		69,400			8,300		41,000		20,100
Depreciation of special equipment		44,000			20,400		7,800		15,800
Salaries of product-line managers		114,200			40,500		38,600		35,100
Allocated common fixed expenses*		184,600			53,200		80,800		50,600
Total fixed expenses		412,200			122,400		168,200		121,600
Net operating income (loss)	$	28,800		$	23,600	$	32,800	$	(27,600)

*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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