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 $ 928,000 $ 261,000 $ 408,000 $ 259,000 Variable manufacturing and selling expenses 457,000 115,000 191,000 151,000 Contribution margin 471,000 146,000 217,000 108,000 Fixed expenses: Advertising, traceable 70,400 8,600 40,800 21,000 Depreciation of special equipment 42,700 20,100 7,200 15,400 Salaries of product-line managers 115,800 40,100 38,800 36,900 Allocated common fixed expenses* 185,600 52,200 81,600 51,800 Total fixed expenses 414,500 121,000 168,400 125,100 Net operating income (loss) $ 56,500 $ 25,000 $ 48,600 $ (17,100) *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.
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 | $ | 928,000 | $ | 261,000 | $ | 408,000 | $ | 259,000 | ||||
Variable manufacturing and selling expenses | 457,000 | 115,000 | 191,000 | 151,000 | ||||||||
Contribution margin | 471,000 | 146,000 | 217,000 | 108,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 70,400 | 8,600 | 40,800 | 21,000 | ||||||||
42,700 | 20,100 | 7,200 | 15,400 | |||||||||
Salaries of product-line managers | 115,800 | 40,100 | 38,800 | 36,900 | ||||||||
Allocated common fixed expenses* | 185,600 | 52,200 | 81,600 | 51,800 | ||||||||
Total fixed expenses | 414,500 | 121,000 | 168,400 | 125,100 | ||||||||
Net operating income (loss) | $ | 56,500 | $ | 25,000 | $ | 48,600 | $ | (17,100) | ||||
*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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