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 $ 918,000 $ 264,000 $ 403,000 $ 251,000 Variable manufacturing and selling expenses 455,000 110,000 191,000 154,000 Contribution margin 463,000 154,000 212,000 97,000 Fixed expenses: Advertising, traceable 70,600 9,000 40,900 20,700 Depreciation of special equipment 44,000 20,900 7,700 15,400 Salaries of product-line managers 116,000 40,500 38,700 36,800 Allocated common fixed expenses* 183,600 52,800 80,600 50,200 Total fixed expenses 414,200 123,200 167,900 123,100 Net operating income (loss) $ 48,800 $ 30,800 $ 44,100 $ (26,100) *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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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	$	918,000		$	264,000	$	403,000	$	251,000
Variable manufacturing and selling expenses		455,000			110,000		191,000		154,000
Contribution margin		463,000			154,000		212,000		97,000
Fixed expenses:
Advertising, traceable		70,600			9,000		40,900		20,700
Depreciation of special equipment		44,000			20,900		7,700		15,400
Salaries of product-line managers		116,000			40,500		38,700		36,800
Allocated common fixed expenses*		183,600			52,800		80,600		50,200
Total fixed expenses		414,200			123,200		167,900		123,100
Net operating income (loss)	$	48,800		$	30,800	$	44,100	$	(26,100)

*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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