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.

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	$	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.

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