The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2562545 • Letter: T
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:
*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:
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.
Complete this question by entering your answers in the tabs below.
Required 1
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
Complete this question by entering your answers in the tabs below.
Required 2
Should the production and sale of racing bikes be discontinued?
Required 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.
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 924,000 $ 265,000 $ 403,000 $ 256,000 Variable manufacturing and selling expenses 474,000 115,000 203,000 156,000 Contribution margin 450,000 150,000 200,000 100,000 Fixed expenses: Advertising, traceable 70,100 8,600 40,600 20,900 Depreciation of special equipment 43,700 20,800 7,700 15,200 Salaries of product-line managers 113,800 40,200 38,100 35,500 Allocated common fixed expenses* 184,800 53,000 80,600 51,200 Total fixed expenses 412,400 122,600 167,000 122,800 Net operating income (loss) $ 37,600 $ 27,400 $ 33,000 $ (22,800)
*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.
Complete this question by entering your answers in the tabs below.
Required 1
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
Complete this question by entering your answers in the tabs below.
Required 2
Should the production and sale of racing bikes be discontinued?
Yes NoRequired 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.
Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Net operating income (loss)Explanation / Answer
1 Total Total without Racing Bikes Net income increase(decrease) Sales 924000 668000 -256000 Variable manufacturing and selling expenses 474000 318000 156000 Contribution margin 450000 350000 -100000 Fixed expenses: Advertising, traceable 70100 49200 20900 Depreciation of special equipment 43700 43700 0 Salaries of product-line managers 113800 78300 35500 Allocated common fixed expenses 184800 184800 0 Total fixed expenses 412400 356000 56400 Net operating income (loss) 37600 -6000 -43600 Financial advantage (disadvantage) per quarter = -43600 2 No 3 Totals Dirt Bikes Mountain Bikes Racing Bikes Sales 924000 265000 403000 256000 Variable manufacturing and selling expenses 474000 115000 203000 156000 Contribution margin 450000 150000 200000 100000 Traceable Fixed expenses: Advertising, traceable 70100 8600 40600 20900 Depreciation of special equipment 43700 20800 7700 15200 Salaries of product-line managers 113800 40200 38100 35500 Total Traceable Fixed expenses 227600 69600 86400 71600 Product margin 222400 80400 113600 28400 Allocated common fixed expenses 184800 Net operating income (loss) 37600