Question

In: Accounting

Michael’s Bicycles manufactures different types of bicycles: mountain, road, and youth. Sales of the road bikes...

Michael’s Bicycles manufactures different types of bicycles: mountain, road, and youth. Sales of the road bikes have fallen. The firm is considering two options:

(1) drop the road bike line; or

(2) replace the road bike line with fat tire bikes.

Price and cost data are as follows:

Mountain

Road

Youth

Fat Tire

Price/unit

$400

$1200

$120

$600

Variable cost/unit

$300

$600

$75

$400

Total Fixed costs

$3,000,000

$2,500,000

$500,000

$1,000,000

Number of units

15,000

4,000

20,000

10,000


If the road bike line is dropped, 60% of the $2,500,000 fixed cost is avoidable.

Required:

a)         Calculate the increase or decrease on operating income, using relevant amounts only, for option 1. Be sure to indicate if the operating profits increase or decrease.

b)         Calculate the increase or decrease on operating income, using relevant amounts only, for option 2. Be sure to indicate if the operating profits increase or decrease.

c)         Which option is best? Identify one longer term strategic issue the firm should consider before making the final decision.

Solutions

Expert Solution

a)

Continue Road bike line [1] Drop the road bike line [2] Increase /(decrease) in income if road bike is dropped [2-1]
Sales 1200*4000=4800000 0 -4800000
less:Variable cost 600*4000=-2400000 0 2400000
Fixed cost -2500000 -1000000 [2500000(1-.60 avoidable] 1500000
Increase/(decrease )in income -900000

Operating income will decrease by 900000 if Road bike is dropped.

b)

Continue Road bike line[3] Replace the road bike line with Fat tire [4] Increase /(decrease) in income if road bike is replaced [4-3]
Sales 1200*4000= 4800000 600*10000=6000000 1200000
Variable cost 600*4000=- 2400000 400*10000= -4000000 -1600000
Fixed cost -2500000 -1000000 1500000
Operating income /(loss) -100000 1000000 1100000

Operating income will increase by $ 1,100,000

c)Option 2 is Best as operating income will increase by 1,100,000

The firm should consider the market before introducing fat tire and replacing Road bike line .Whether existing production facilities are enough for production of fat tire or not.

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Peak Bikes, a national bicycle manufacturing company that specializes in producing off-road bicycles (mountain bikes), has...
Peak Bikes, a national bicycle manufacturing company that specializes in producing off-road bicycles (mountain bikes), has hired you as an outside consultant. Peak Bikes currently has 170 both full-time and part-time employees. The firm’s management is organized as follows: Frontline managers: Oversee bike production and production staff. This is the part of the company that actually manufacturers the bicycles. Middle-level managers: Manage frontline managers, track performance versus company’s goals and strategy, and report to top level managers Top-level managers: Set...
Bianca Bicycle Company manufactures mountain bikes with a variable cost of $1,600. The bicycles sell for...
Bianca Bicycle Company manufactures mountain bikes with a variable cost of $1,600. The bicycles sell for $2,350 each. Budgeted fixed manufacturing overhead for the most recent year was $11,600,000. Planned and actual production for the year were the same. State whether income is higher under variable or absorption costing and the amount of the difference in reported opearting income under the two methods. Treat each condition as an independent case. (Round intermediate calculations to 2 decimal places.) 1. Production 22,600...
Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in...
Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in western Canada. Below is a partial list of expense items incurred in the most recent month (November), when 1,180 bicycles were manufactured, shipped, and sold. There was no beginning or ending work in process or finished goods inventory in November:   Item October November   Units produced and sold 1,080 1,180   Sales $ 1,080,000 $ 1,180,000   Leather used for the bicycle seats 30,240 33,040   Production manager’s...
Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in...
Cycle Business manufactures and sells road and mountain bikes through a network of retail outlets in western Canada. Below is a partial list of expense items incurred in the most recent month (November), when 1,060 bicycles were manufactured, shipped, and sold. There was no beginning or ending work in process or finished goods inventory in November:   Item October November   Units produced and sold 960 1,060   Sales $ 960,000 $ 1,060,000   Leather used for the bicycle seats 34,560 38,160   Production manager’s...
Question 1 Odyssey manufactures mountain bikes. One well-known and established competitor of Odyssey was Bazookadale Bicycles....
Question 1 Odyssey manufactures mountain bikes. One well-known and established competitor of Odyssey was Bazookadale Bicycles. Bazookadale concentrates on customer service and had introduced a new computer system just before the Holiday season on November 15, 2011 to help retailers fit customers with the right frame size. The computer system automatically generated a customer database and was given free of charge to the retailers. The retailers loved the system because (1) it allowed them to keep track of who their...
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 $ 927,000 $ 262,000 $ 407,000 $ 258,000 Variable manufacturing and selling expenses 475,000 117,000 200,000 158,000 Contribution margin 452,000 145,000 207,000 100,000 Fixed expenses: Advertising, traceable 69,400 8,200 40,300 20,900 Depreciation of special equipment 44,700 21,000 7,900 15,800 Salaries of product-line managers 114,400...
The Regal Cycle Company manufactures three types of bicycles—adirt 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:TotalDirtBikesMountain BikesRacingBikesSales$918,000$264,000$404,000$250,000Variable manufacturing and selling expenses474,000117,000202,000155,000Contribution margin444,000147,000202,00095,000Fixed expenses:Advertising, traceable70,3008,90040,80020,600Depreciation of special equipment44,10020,9007,80015,400Salaries of product-line managers115,20040,80038,30036,100Allocated common fixed expenses*183,60052,80080,80050,000Total fixed expenses413,200123,400167,700122,100Net operating income (loss)$30,800$23,600$34,300$(27,100)*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...
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 $ 935,000 $ 269,000 $ 408,000 $ 258,000 Variable manufacturing and selling expenses 472,000 118,000 203,000 151,000 Contribution margin 463,000 151,000 205,000 107,000 Fixed expenses: Advertising, traceable 69,500 8,400 40,600 20,500 Depreciation of special equipment 43,800 21,000 7,300 15,500 Salaries of product-line managers 114,900...
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 $ 919,000 $ 262,000 $ 401,000 $ 256,000 Variable manufacturing and selling expenses 471,000 118,000 198,000 155,000 Contribution margin 448,000 144,000 203,000 101,000 Fixed expenses: Advertising, traceable 69,300 8,300 40,700 20,300 Depreciation of special equipment 44,100 20,900 7,900 15,300 Salaries of product-line managers 115,700...
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...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT