Should the production and sale of racing bikes be discontinued? The Regal Cycle
ID: 2531555 • Letter: S
Question
Should the production and sale of racing bikes be discontinued?
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 Mountain Racing Dirt Bikes Total Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $. 932,000 $267,000 $. 406,000 ? 259,000 475,000 119,000 457,000 148,000 203,000 203,000 153,000 106,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 70,600 40,800 7,400 38,800 81,200 168,200 20,900 15,600 35,800 51,800 124,100 8,900 43,400 20,400 115,000 40,400 186,400 415,400 123,100 53.400 Total fixed expenses Net operating income (loss) $ 41,600 24,90 $ 34,800 $(18,100) 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 linesExplanation / Answer
Answer:
1
the impact on net operating income by discontinuing racing bikes =Profit will decreased by $49,300
Working notes for the above answer is as under
Current
total
Total if
racing bike
dropped
Diffrance
net operating
income increse(decrese)
Sales
932000
673000
-259000
Variable manufacturing and selling expenses
475000
322000
153000
Contribution margin
457000
351000
-106000
Fixed expenses:
Advertising, traceable
70600
49700
20900
Depreciation of special equipment
43400
43400
0
Salaries of product-line managers
115000
79200
35800
Allocated common fixed expenses*
186400
186400
0
Total fixed expenses
415400
358700
56700
Net operating income (loss)
41600
-7700
-49300
___________________________________________________________________________________
2
Should production and sale of the racing bikes be discontinued
Answer: NO
______________________________________________________
3
segmented income statement.
Total
Dirt
Mountain
Racing
Bikes
Bikes
Bikes
Sales
932000
267000
406000
259000
Variable manufacturing and selling expenses
475000
119000
203000
153000
Contribution margin
457000
148000
203000
106000
Fixed expenses:
Advertising, traceable
70600
8900
40800
20900
Depreciation of special equipment
43400
20400
7400
15600
Salaries of product-line managers
115000
40400
38800
35800
Total Tracable Fixed Expanses
229000
69700
87000
72300
Product line segment Margin
228000
78300
116000
33700
Common fixed expenses
186400
Net operating income (loss)
41600
Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product line
Answer: Yes
Current
total
Total if
racing bike
dropped
Diffrance
net operating
income increse(decrese)
Sales
932000
673000
-259000
Variable manufacturing and selling expenses
475000
322000
153000
Contribution margin
457000
351000
-106000
Fixed expenses:
Advertising, traceable
70600
49700
20900
Depreciation of special equipment
43400
43400
0
Salaries of product-line managers
115000
79200
35800
Allocated common fixed expenses*
186400
186400
0
Total fixed expenses
415400
358700
56700
Net operating income (loss)
41600
-7700
-49300