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 $ 405,000 $ 252,000 Variable manufacturing and selling expenses 473,000 111,000 205,000 157,000 Contribution margin 450,000 155,000 200,000 95,000 Fixed expenses: Advertising, traceable 69,200 8,400 40,600 20,200 Depreciation of special equipment 43,400 20,700 7,200 15,500 Salaries of product-line managers 114,600 40,600 38,100 35,900 Allocated common fixed expenses* 184,600 53,200 81,000 50,400 Total fixed expenses 411,800 122,900 166,900 122,000 Net operating income (loss) $ 38,200 $ 32,100 $ 33,100 $ (27,000) *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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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	$ 405,000	$ 252,000
Variable manufacturing and selling expenses	473,000	111,000	205,000	157,000
Contribution margin	450,000	155,000	200,000	95,000
Fixed expenses:
Advertising, traceable	69,200	8,400	40,600	20,200
Depreciation of special equipment	43,400	20,700	7,200	15,500
Salaries of product-line managers	114,600	40,600	38,100	35,900
Allocated common fixed expenses*	184,600	53,200	81,000	50,400
Total fixed expenses	411,800	122,900	166,900	122,000
Net operating income (loss)	$ 38,200	$ 32,100	$ 33,100	$ (27,000)

*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.

Required 1 Required 2 Required 3
Prepare a properly formatted segmented income statement that would be more useful to management in assessin
profitability of the various product lines.
Contribution margin (loss)
Traceable fixed expenses:
Total traceable fixed expenses
Product line segment margin (loss)
Net operating income (loss)
Totals
Dirt Bikes Mountain Bikes Racing Bikes

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