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 $ 927,000 $ 269,000 $ 407,000 $ 251,000
Variable manufacturing and selling expenses 476,000 116,000 200,000 160,000
Contribution margin 451,000 153,000 207,000 91,000
Fixed expenses:
Advertising, traceable 69,300 8,500 40,700 20,100
Depreciation of special equipment 42,700 20,200 7,300 15,200
Salaries of product-line managers 115,300 40,500 38,600 36,200
Allocated common fixed expenses* 185,400 53,800 81,400 50,200
Total fixed expenses 412,700 123,000 168,000 121,700
Net operating income (loss) $ 38,300 $ 30,000 $ 39,000 $ (30,700)

*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.

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

1.

Contribution margin of Racing Bikes = $91,000

Traceable fixed costs of Racing bikes = Advertising + Depreciation of special equipment + Salaries of product line managers

= 20,100 + 15,200 + 36,200

= $71,500

Hence, segment margin of Racing bikes = Contribution margin - Traceable fixed costs

= 91,000 - 71,500

= $19,500

Hence, financial disadvantage if Racing bikes is discontinued = $19,500

2.

If Racing bikes is discontinued, there will be loss of margin of $19,500 provided by the Racing bikes. Hence Racing bikes should not be discontinued.

3.

Segmented income statement

Totals Dirt bikes Mountain bikes Racing bikes
Sales (i) 927,000 269,000 407,000 251,000
Variable manufacturing and selling expenses (ii) 476,000 116,000 200,000 160,000
Contribution margin (i) - (ii) = (iii) 451,000 153,000 207,000 91,000
Traceable fixed costs:
Advertising 69,300 8,500 40,700 20,100
Depreciation of special equipment 42,700 20,200 7,300 15,200
Salaries of product line managers 115,300 40,500 38,600 36,200
Total traceable fixed expenses (iv) 227,300 69,200 86,600 71,500
Product line segment margin (iii)- (iv) = (v) 223,700 83,800 120,400 19,500
Allocated common fixed expenses (vi) 185,400 53,800 81,400 50,200
Net operating profit (loss) (v) - (vi) 38,300 30,000 39,000 (30,700)

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