Question

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	$	930,000		$	267,000		$	405,000		$	258,000
Variable manufacturing and selling expenses		469,000			112,000			206,000			151,000
Contribution margin		461,000			155,000			199,000			107,000
Fixed expenses:
Advertising, traceable		69,900			8,500			40,500			20,900
Depreciation of special equipment		43,800			20,300			7,600			15,900
Salaries of product-line managers		114,100			40,200			38,600			35,300
Allocated common fixed expenses*		186,000			53,400			81,000			51,600
Total fixed expenses		413,800			122,400			167,700			123,700
Net operating income (loss)	$	47,200		$	32,600		$	31,300		$	(16,700)

*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.

1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Answer 1

1

calculation of the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes is as under

	Current Tota	Total IfRacing BikesAre Dropped	Difference : NetOperatingIncome Increaseor (Decrease
Sales	930000	672000	-258000
Variable manufacturing and selling expenses	469000	318000	151000
Contribution margin	461000	354000	-107000
Fixed expenses:
Advertising, traceable	69900	49000	20900
Depreciation of special equipment	43800	43800	0
Salaries of product-line managers	114100	78800	35300
Allocated common fixed expenses*	186000	186000	0
Total fixed expenses	413800	357600	56200
Net operating income (loss)	47200	-3600	-50800

Financial Disadvantage by discontinuing the Racing Bikes =decrease in net income by $50800

production and sale of the racing bikes should not be discontinued