e 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 $ 926,000 $ 266,000 $ 403,000 $ 257,000 Variable manufacturing and selling expenses 479,000 111,000 209,000 159,000 Contribution margin 447,000 155,000 194,000 98,000 Fixed expenses: Advertising, traceable 69,700 8,600 41,000 20,100 Depreciation of special equipment 44,100 20,900 7,500 15,700 Salaries of product-line managers 115,300 40,100 38,500 36,700 Allocated common fixed expenses* 185,200 53,200 80,600 51,400 Total fixed expenses 414,300 122,800 167,600 123,900 Net operating income (loss) $ 32,700 $ 32,200 $ 26,400 $ (25,900) *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 line

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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	$	926,000		$	266,000	$	403,000	$	257,000
Variable manufacturing and selling expenses		479,000			111,000		209,000		159,000
Contribution margin		447,000			155,000		194,000		98,000
Fixed expenses:
Advertising, traceable		69,700			8,600		41,000		20,100
Depreciation of special equipment		44,100			20,900		7,500		15,700
Salaries of product-line managers		115,300			40,100		38,500		36,700
Allocated common fixed expenses*		185,200			53,200		80,600		51,400
Total fixed expenses		414,300			122,800		167,600		123,900
Net operating income (loss)	$	32,700		$	32,200	$	26,400	$	(25,900)

*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.

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