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 $ 920,000 $ 267,000 $ 401,000 $ 252,000 Variable manufacturing and selling expenses 464,000 118,000 191,000 155,000 Contribution margin 456,000 149,000 210,000 97,000 Fixed expenses: Advertising, traceable 69,600 8,600 40,200 20,800 Depreciation of special equipment 44,300 20,900 7,800 15,600 Salaries of product-line managers 114,100 40,000 38,300 35,800 Allocated common fixed expenses* 184,000 53,400 80,200 50,400 Total fixed expenses 412,000 122,900 166,500 122,600 Net operating income (loss) $ 44,000 $ 26,100 $ 43,500 $ (25,600) *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	$	920,000		$	267,000	$	401,000	$	252,000
Variable manufacturing and selling expenses		464,000			118,000		191,000		155,000
Contribution margin		456,000			149,000		210,000		97,000
Fixed expenses:
Advertising, traceable		69,600			8,600		40,200		20,800
Depreciation of special equipment		44,300			20,900		7,800		15,600
Salaries of product-line managers		114,100			40,000		38,300		35,800
Allocated common fixed expenses*		184,000			53,400		80,200		50,400
Total fixed expenses		412,000			122,900		166,500		122,600
Net operating income (loss)	$	44,000		$	26,100	$	43,500	$	(25,600)

*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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