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 $ 936,000 $ 268,000 $ 409,000 $ 259,000 Variable manufacturing and selling expenses 465,000 112,000 198,000 155,000 Contribution margin 471,000 156,000 211,000 104,000 Fixed expenses: Advertising, traceable 69,400 8,400 40,500 20,500 Depreciation of special equipment 43,600 21,000 7,300 15,300 Salaries of product-line managers 114,100 40,100 38,800 35,200 Allocated common fixed expenses* 187,200 53,600 81,800 51,800 Total fixed expenses 414,300 123,100 168,400 122,800 Net operating income (loss) $ 56,700 $ 32,900 $ 42,600 $ (18,800) *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	$	936,000		$	268,000	$	409,000	$	259,000
Variable manufacturing and selling expenses		465,000			112,000		198,000		155,000
Contribution margin		471,000			156,000		211,000		104,000
Fixed expenses:
Advertising, traceable		69,400			8,400		40,500		20,500
Depreciation of special equipment		43,600			21,000		7,300		15,300
Salaries of product-line managers		114,100			40,100		38,800		35,200
Allocated common fixed expenses*		187,200			53,600		81,800		51,800
Total fixed expenses		414,300			123,100		168,400		122,800
Net operating income (loss)	$	56,700		$	32,900	$	42,600	$	(18,800)

*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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