In: Accounting
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 $ 262,000 $ 410,000 $ 254,000 Variable manufacturing and selling expenses 470,000 113,000 206,000 151,000 Contribution margin 456,000 149,000 204,000 103,000 Fixed expenses: Advertising, traceable 70,100 8,800 40,800 20,500 Depreciation of special equipment 43,800 20,500 7,600 15,700 Salaries of product-line managers 115,600 41,000 39,000 35,600 Allocated common fixed expenses* 185,200 52,400 82,000 50,800 Total fixed expenses 414,700 122,700 169,400 122,600 Net operating income (loss) $ 41,300 $ 26,300 $ 34,600 $ (19,600)
*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.
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.
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1) | Financial Disadvantage | (46,900) | |||
Current net operating income | 41,300 | ||||
Less: Loss of Contribution margin by dropping Racing Bikes segment | (103,000) | ||||
Add: Saving in traceable fixed cost belongs to racing bike segment | 56,100 | (20500+35600) | |||
Total income of The Regal Cycle company after dropping racing bike segment | (5,600) | ||||
Financial Disadvantage | (46,900) | ||||
2) | No, production and sale of racing bikes should not be discontinued | ||||
3) | Totals | Dirt Bikes | Mountain Bikes | Racing Bikes | |
Sales | 926,000 | 262,000 | 410,000 | 254,000 | |
Variable manufacturing and selling Expenses | 470,000 | 113,000 | 206,000 | 151,000 | |
Contribution Margin | 456,000 | 149,000 | 204,000 | 103,000 | |
Traceable Fixed Expenses: | |||||
Advertising, Traceable | 70,100 | 8,800 | 40,800 | 20,500 | |
Depreciation of Special Equipments | 43,800 | 20,500 | 7,600 | 15,700 | |
Saalries of Product Line Workers | 115,600 | 41,000 | 39,000 | 35,600 | |
Total Traceable fixed expense | 229,500 | 70,300 | 87,400 | 71,800 | |
Product Line Segment Margin/(Loss) | 226,500 | 78,700 | 116,600 | 31,200 | |
Common Fixed cost | 185,200 | ||||
Net Operating Income / (Loss) | 41,300 | ||||