Question
In: Finance
:Roan Bicycle Manufactures Mountain, BMX, and Hybrid bicycles. Sales and expense data for the past month...
:Roan Bicycle Manufactures Mountain, BMX, and Hybrid bicycles. Sales and expense data for the past month follow:
|
Total |
Mountain Bicycle |
BMX Bicycle |
Hybrid Bicycle |
|
|
Revenue |
$ 880,000 |
$ 190,000 |
$430,000 |
$260,000 |
|
Variable expense |
420,000 |
80,000 |
220,000 |
120,000 |
|
Contribution Margin |
460,000 |
110,000 |
210,000 |
140,000 |
|
Fixed Expenses: |
||||
|
Advertising-traceable |
168,000 |
55,000 |
60,000 |
53,000 |
|
Depreciation of special equipment |
85,000 |
25,000 |
30,000 |
30,000 |
|
Line Supervisors’ salaries |
68,000 |
28,000 |
24,000 |
16,000 |
|
General Administrative overhead* |
99,000 |
32,000 |
45,000 |
22,000 |
|
Total Fixed expenses |
420,000 |
140,000 |
159,000 |
121,000 |
|
Net Operating Income (loss) |
40,000 |
(30,000) |
51,000 |
19,000 |
* A common fixed cost that is allocated on the basis of sales dollars
Management is concerned about the continued losses shown by the round Mountain Bicycle and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce the mountain bicycle has no resale value. If the mountain bicycle model is dropped, the two-line supervisors assigned to the model would be discharged.
REQUIREMENT
1. What is the financial advantage (disadvantage) of discontinuing the mountain bicycle? The company has no other use for the capacity now being used to produce the mountain bicycle. Show computations to support your answer.
2. Recast the above data in a format that would
be more useful to management in assessing the
profitability of the various product lines
Solutions
Expert Solution
| AS PER QUESTION | ||||
| A | ||||
| Total | Mountain Bicycle | BMX Bicycle | Hybrid Bicycle | TOTAL |
| AMOUNT IN $ | ||||
| Revenue | 190000 | 430000 | 260000 | 880000 |
| Variable expense | 80000 | 220000 | 120000 | 420000 |
| Contribution Margin | 110000 | 210000 | 140000 | 460000 |
| Fixed Expenses Own Division | ||||
| Advertising-traceable | 55000 | 60000 | 53000 | 168000 |
| Depreciation of special equipment | 25000 | 30000 | 30000 | 85000 |
| Line Supervisors’ salaries | 28000 | 24000 | 16000 | 68000 |
| TOTAL FIXED OH OWN DIVISION | 108000 | 114000 | 99000 | 321000 |
| PROFIT BEFORE ALLOCATION OF GENERAL FIXED OH | 2000 | 96000 | 41000 | 139000 |
| General Administrative overhead* | 32000 | 45000 | 22000 | 99000 |
| NET OPERATING INCOME | -30000 | 51000 | 19000 | 40000 |
| AS PER QUESTION | ||||
| B | ||||
| Total | Mountain Bicycle | BMX Bicycle | Hybrid Bicycle | TOTAL |
| AMOUNT IN $ | ||||
| Revenue | 190000 | 430000 | 260000 | 880000 |
| Variable expense | 80000 | 220000 | 120000 | 420000 |
| Contribution Margin | 110000 | 210000 | 140000 | 460000 |
| % on Sales | 58% | 49% | 54% | 52% |
| Fixed Expenses Own Division | ||||
| Advertising-traceable | 55000 | 60000 | 53000 | 168000 |
| % on Sales | 29% | 14% | 20% | 19% |
| Depreciation of special equipment | 25000 | 30000 | 30000 | 85000 |
| % on Sales | 13% | 7% | 12% | 10% |
| Line Supervisors’ salaries | 28000 | 24000 | 16000 | 68000 |
| % on Sales | 15% | 6% | 6% | 8% |
| TOTAL FIXED OH OWN DIVISION | 108000 | 114000 | 99000 | 321000 |
| PROFIT BEFORE ALLOCATION OF GENERAL FIXED OH | 2000 | 96000 | 41000 | 139000 |
| General Administrative overhead* | 21375 | 48375 | 29250 | 99000 |
| NET OPERATING INCOME | -19375 | 47625 | 11750 | 40000 |
| If General Administrative overhead allocated on the basis of revenue | ||||
| IF WE DROPPED Mountain Bicycle | ||||
| C | ||||
| Total | Mountain Bicycle | BMX Bicycle | Hybrid Bicycle | TOTAL |
| AMOUNT IN $ | ||||
| Revenue | 430000 | 260000 | 690000 | |
| Variable expense | 220000 | 120000 | 340000 | |
| Contribution Margin | 210000 | 140000 | 350000 | |
| Fixed Expenses: | ||||
| Advertising-traceable | 60000 | 53000 | 113000 | |
| Depreciation of special equipment | 30000 | 30000 | 60000 | |
| Line Supervisors’ salaries | 24000 | 16000 | 40000 | |
| General Administrative overhead* | 61696 | 37304 | 99000 | |
| TOTAL FIXED EXPENSE | 175696 | 136304 | 312000 | |
| NET OPERATING INCOME | 34304 | 3696 | 38000 | |
| *GENERAL ADMN OVER HEADS ALLOCATED ON THE BASIS OF REVENUE | ||||
| BASED ON ANSWER B | ||||
| As per the question, it is mentioned that allocation of Administarive over heads is on the baisis of revenue ,the calculation | ||||
| is not correct if the allocation of General Admn OH is based on revenue , the Net income is shown below | ||||
| Mountain Bicycle | BMX Bicycle | Hybrid Bicycle |
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