Question

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	$	929,000		$	261,000		$	409,000		$	259,000
Variable manufacturing and selling expenses		478,000			116,000			209,000			153,000
Contribution margin		451,000			145,000			200,000			106,000
Fixed expenses:
Advertising, traceable		70,400			8,600			41,000			20,800
Depreciation of special equipment		44,400			20,900			7,600			15,900
Salaries of product-line managers		115,800			40,300			38,500			37,000
Allocated common fixed expenses*		185,800			52,200			81,800			51,800
Total fixed expenses		416,400			122,000			168,900			125,500
Net operating income (loss)	$	34,600		$	23,000		$	31,100		$	(19,500)

*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.

*NOTE From Poster* If you are using excel to answer this problem, please include your formulas for how you obtained the numbers in your cells for each part. Thank you sincerely for your time!

Answer 1

Formulaes :