The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun
ID: 2563305 • 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:
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.
Total DirtBikes Mountain Bikes Racing
Bikes Sales $ 920,000 $ 262,000 $ 403,000 $ 255,000 Variable manufacturing and selling expenses 459,000 112,000 191,000 156,000 Contribution margin 461,000 150,000 212,000 99,000 Fixed expenses: Advertising, traceable 70,000 8,900 41,000 20,100 Depreciation of special equipment 43,500 20,600 7,400 15,500 Salaries of product-line managers 115,400 40,100 38,300 37,000 Allocated common fixed expenses* 184,000 52,400 80,600 51,000 Total fixed expenses 412,900 122,000 167,300 123,600 Net operating income (loss) $ 48,100 $ 28,000 $ 44,700 $ (24,600)
Explanation / Answer
1 Total Total without Racing Bikes Difference Sales 920000 665000 -255000 Variable manufacturing and selling expenses 459000 303000 156000 Contribution margin 461000 362000 -99000 Fixed expenses: Advertising, traceable 70000 49900 20100 Depreciation of special equipment 43500 43500 0 Salaries of product-line managers 115400 78400 37000 Allocated common fixed expenses 184000 184000 0 Total fixed expenses 412900 355800 57100 Net operating income (loss) 48100 6200 -41900 2 No, production and sale of racing bikes should not be discontinued 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 920000 262000 403000 255000 Variable manufacturing and selling expenses 459000 112000 191000 156000 Contribution margin 461000 150000 212000 99000 Traceable Fixed expenses: Advertising, traceable 70000 8900 41000 20100 Depreciation of special equipment 43500 20600 7400 15500 Salaries of product-line managers 115400 40100 38300 37000 Total Traceable Fixed expenses 228900 69600 86700 72600 Segment margin 232100 80400 125300 26400 Allocated common fixed expenses 184000 Net operating income (loss) 48100