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 $ 921,000 $ 264,000 $ 403,000 $ 254,000
Variable manufacturing and selling expenses 464,000 116,000 191,000 157,000
Contribution margin 457,000 148,000 212,000 97,000
Fixed expenses:
Advertising, traceable 69,400 8,100 40,400 20,900
Depreciation of special equipment 43,400 20,900 7,300 15,200
Salaries of product-line managers 113,600 40,500 38,000 35,100
Allocated common fixed expenses* 184,200 52,800 80,600 50,800
Total fixed expenses 410,600 122,300 166,300 122,000
Net operating income (loss) $ 46,400 $ 25,700 $ 45,700 $ (25,000)

*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.

Complete this question by entering your answers in the tabs below.

  • Required 1
  • Required 2
  • Required 3

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

  • Required 1
  • Required 2
  • Required 3

Should the production and sale of racing bikes be discontinued?

Yes
No
  • Required 1
  • Required 2
  • Required 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.

Totals Dirt Bikes Mountain Bikes Racing Bikes
Contribution margin (loss)
Traceable fixed expenses:
Total traceable fixed expenses
Product line segment margin (loss)
Net operating income (loss)

Solutions

Expert Solution

Ans:

1a .Computation of Total Financial Advantage / Disadvantage by Dropping Racing Bikes
Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income
Sales $ 921,000.00 $ 667,000.00 $ -254,000.00
Variable Manufacturing And Selling Expenses $ 464,000.00 $ 307,000.00 $ 157,000.00
Contribution Margin (Loss) (a) $ 457,000.00 $ 360,000.00 $ -97,000.00
Fixed Expenses:
Advertising, Traceable $ 69,400.00 $ 48,500.00 $ 20,900.00
Depreciation On Special Equipment $ 43,400.00 $ 43,400.00 $ 0.00
Salaries Of Product Manager $ 113,600.00 $ 78,500.00 $ 35,100.00
Common Allocated Costs $ 184,200.00 $ 184,200.00 $ 0.00
Total Fixed Expenses (b) $ 410,600.00 $ 354,600.00 $ 56,000.00
Net Operating Income (Loss) (a-b) $ 46,400.00 $ 5,400.00 $ -41,000.00
Financial Disadvantage for 41000 by dropping Racing Bikes
2. No
3
Total Dirt Bikes Mountain Bikes Racing Bikes
Sales $ 921,000.00 $ 264,000.00 $ 403,000.00 $ 254,000.00
Variable Manufacturing And Selling Expenses $ 464,000.00 $ 116,000.00 $ 191,000.00 $ 157,000.00
Contribution Margin (Loss) (a) $ 457,000.00 $ 148,000.00 $ 212,000.00 $ 97,000.00
Traceable Fixed Expenses:
Advertising, Traceable $ 69,400.00 $ 8,100.00 $ 40,400.00 $ 20,900.00
Depreciation On Special Equipment $ 43,400.00 $ 20,900.00 $ 7,300.00 $ 15,200.00
Salaries Of Product Manager $ 113,600.00 $ 40,500.00 $ 38,000.00 $ 35,100.00
Total Traceable Fixed Expenses (b) $ 226,400.00 $ 69,500.00 $ 85,700.00 $ 71,200.00
Product Line Segment Margin (a-) $ 230,600.00 $ 78,500.00 $ 126,300.00 $ 25,800.00
Common Fixed Expenses $ 184,200.00
Net Operating Income (Loss) $ 46,400.00
3. Yes , Segmental income is more Useful.


Hope this helped ! Let me know in case of any queries.


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