In: Accounting
expenses for the past quarter follow:
Total | Dirt Bikes |
Mountain Bikes | Racing Bikes |
|||||||||
Sales | $ | 935,000 | $ | 269,000 | $ | 409,000 | $ | 257,000 | ||||
Variable manufacturing and selling expenses | 483,000 | 116,000 | 208,000 | 159,000 | ||||||||
Contribution margin | 452,000 | 153,000 | 201,000 | 98,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,300 | 8,700 | 40,300 | 20,300 | ||||||||
Depreciation of special equipment | 44,100 | 20,800 | 7,800 | 15,500 | ||||||||
Salaries of product-line managers | 114,500 | 40,600 | 38,800 | 35,100 | ||||||||
Allocated common fixed expenses* | 187,000 | 53,800 | 81,800 | 51,400 | ||||||||
Total fixed expenses | 414,900 | 123,900 | 168,700 | 122,300 | ||||||||
Net operating income (loss) | $ | 37,100 | $ | 29,100 | $ | 32,300 | $ | (24,300) | ||||
*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.