In: Accounting
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 | $ | 918,000 | $ | 267,000 | $ | 401,000 | $ | 250,000 | ||||
Variable manufacturing and selling expenses | 478,000 | 111,000 | 209,000 | 158,000 | ||||||||
Contribution margin | 440,000 | 156,000 | 192,000 | 92,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,300 | 9,000 | 40,200 | 20,100 | ||||||||
Depreciation of special equipment | 44,000 | 20,300 | 7,800 | 15,900 | ||||||||
Salaries of product-line managers | 115,100 | 40,600 | 38,300 | 36,200 | ||||||||
Allocated common fixed expenses* | 183,600 | 53,400 | 80,200 | 50,000 | ||||||||
Total fixed expenses | 412,000 | 123,300 | 166,500 | 122,200 | ||||||||
Net operating income (loss) | $ | 28,000 | $ | 32,700 | $ | 25,500 | $ | (30,200) | ||||
*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.