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 $ 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.

Totals Dirt Bikes Mountain Bikes Racing Bikes
Contribution margin (loss) 0 0 0 0
Traceable fixed expenses:
Total traceable fixed expenses 0 0 0 0
Product line segment margin (loss) 0 $0 $0 $0
Net operating income (loss) $0
  • Required 2

Solutions

Expert Solution

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

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