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 $ 929,000 $ 267,000 $ 404,000 $ 258,000
Variable manufacturing and selling expenses 485,000 119,000 209,000 157,000
Contribution margin 444,000 148,000 195,000 101,000
Fixed expenses:
Advertising, traceable 69,900 8,500 40,900 20,500
Depreciation of special equipment 43,900 20,800 8,000 15,100
Salaries of product-line managers 114,200 40,400 38,100 35,700
Allocated common fixed expenses* 185,800 53,400 80,800 51,600
Total fixed expenses 413,800 123,100 167,800 122,900
Net operating income (loss) $ 30,200 $ 24,900 $ 27,200 $ (21,900)

*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.

Solutions

Expert Solution

1
Current Total Total If Racing Bikes Are Dropped Difference: Net Operating Income
Sales 929000 671000 -258000
Variable manufacturing and selling expenses 485000 328000 157000
Contribution margin (loss) 444000 343000 -101000
Fixed expenses:
Advertising, traceable 69900 49400 20500
Depreciation on special equipment 43900 43900 0
Salaries of product manager 114200 78500 35700
Common allocated costs 185800 185800 0
Total fixed expenses 413800 357600 56200
Net operating income (loss) 30200 -14600 -44800
Financial (disadvantage) $(44800)
2
No, production and sale of racing bikes should not be discontinued
3
Total Dirt Bikes Mountain Bikes Racing Bikes
Sales 929000 267000 404000 258000
Variable manufacturing and selling expenses 485000 119000 209000 157000
Contribution margin (loss) 444000 148000 195000 101000
Traceable fixed expenses:
Advertising, traceable 69900 8500 40900 20500
Depreciation on special equipment 43900 20800 8000 15100
Salaries of product manager 114200 40400 38100 35700
Total traceable fixed expenses 228000 69700 87000 71300
Product line segment margin 216000 78300 108000 29700
Common fixed expenses 185800
Net operating income (loss) 30200

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