Question

In: Accounting

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a...

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 $ 926,000 $ 268,000 $ 402,000 $ 256,000
Variable manufacturing and selling expenses 472,000 115,000 200,000 157,000
Contribution margin 454,000 153,000 202,000 99,000
Fixed expenses:
Advertising, traceable 70,100 8,900 40,200 21,000
Depreciation of special equipment 43,300 20,400 7,300 15,600
Salaries of product-line managers 115,200 40,600 38,600 36,000
Allocated common fixed expenses* 185,200 53,600 80,400 51,200
Total fixed expenses 413,800 123,500 166,500 123,800
Net operating income (loss) $ 40,200 $ 29,500 $ 35,500 $ (24,800)

*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.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.

Solutions

Expert Solution

1.

Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease)
Sales 926000 670000 -256000
Variable manufacturing and selling expenses 472000 315000 157000
Contribution margin (loss) 454000 355000 -99000
Fixed expenses:
Advertising, traceable 70100 49100 21000
Depreciation on special equipment 43300 43300 0
Salaries of product managers 115200 79200 36000
Allocated common fixed expenses 185200 185200 0
Total fixed expenses 413800 356800 57000
Net operating income (loss) 40200 -1800 -42000

2. No

The production and sale of the racing bikes should not be discontinued since it will result in a financial disadvantage of $42000.

3.

Totals Dirt Bikes Mountain Bikes Racing Bikes
Sales 926000 268000 402000 256000
Variable manufacturing and selling expenses 472000 115000 200000 157000
Contribution margin (loss) 454000 153000 202000 99000
Traceable fixed expenses:
Advertising 70100 8900 40200 21000
Depreciation on special equipment 43300 20400 7300 15600
Salaries of product managers 115200 40600 38600 36000
Total traceable fixed expenses 228600 69900 86100 72600
Segment operating income 225400 83100 115900 26400
Common fixed expenses 185200
Net operating income (loss) $ 40200

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