The Regal Cycle Company manufactures three types of bicyclesâa 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 $ 270,000 $ 402,000 $ 254,000 Variable manufacturing and selling expenses 463,000 119,000 193,000 151,000 Contribution margin 463,000 151,000 209,000 103,000 Fixed expenses: Advertising, traceable 69,900 8,700 40,400 20,800 Depreciation of special equipment 44,100 20,500 7,800 15,800 Salaries of product-line managers 115,500 40,100 38,800 36,600 Allocated common fixed expenses* 185,200 54,000 80,400 50,800 Total fixed expenses 414,700 123,300 167,400 124,000 Net operating income (loss) $ 48,300 $ 27,700 $ 41,600 $ (21,000)
*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.
1a. What is the impact on net operating income by discontinuing racing bikes?
2a. Prepare a segmented income statement.
| The Regal Cycle Company manufactures three types of bicyclesâa 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 | $ | 270,000 | $ | 402,000 | $ | 254,000 |
| Variable manufacturing and selling expenses | 463,000 | 119,000 | 193,000 | 151,000 | ||||
| Contribution margin | 463,000 | 151,000 | 209,000 | 103,000 | ||||
| Fixed expenses: | ||||||||
| Advertising, traceable | 69,900 | 8,700 | 40,400 | 20,800 | ||||
| Depreciation of special equipment | 44,100 | 20,500 | 7,800 | 15,800 | ||||
| Salaries of product-line managers | 115,500 | 40,100 | 38,800 | 36,600 | ||||
| Allocated common fixed expenses* | 185,200 | 54,000 | 80,400 | 50,800 | ||||
| Total fixed expenses | 414,700 | 123,300 | 167,400 | 124,000 | ||||
| Net operating income (loss) | $ | 48,300 | $ | 27,700 | $ | 41,600 | $ | (21,000) |
| *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.
|
Related questions
The Regal Cycle Company manufactures three types of bicyclesâadirt bike, a mountain bike, and a racing bike. Data on sales andexpenses for the past quarter follow:
Total | Dirt | Mountain Bikes | Racing | |||||||||
Sales | $ | 930,000 | $ | 269,000 | $ | 402,000 | $ | 259,000 | ||||
Variable manufacturing and selling expenses | 467,000 | 117,000 | 192,000 | 158,000 | ||||||||
Contribution margin | 463,000 | 152,000 | 210,000 | 101,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 70,500 | 8,800 | 41,000 | 20,700 | ||||||||
Depreciation of special equipment | 42,500 | 20,200 | 7,100 | 15,200 | ||||||||
Salaries of product-line managers | 115,100 | 40,700 | 38,800 | 35,600 | ||||||||
Allocated common fixed expenses* | 186,000 | 53,800 | 80,400 | 51,800 | ||||||||
Total fixed expenses | 414,100 | 123,500 | 167,300 | 123,300 | ||||||||
Net operating income (loss) | $ | 48,900 | $ | 28,500 | $ | 42,700 | $ | (22,300) | ||||
*Allocated on the basis of sales dollars.
Management is concerned about the continued losses shown by theracing bikes and wants a recommendation as to whether or not theline should be discontinued. The special equipment used to produceracing bikes has no resale value and does not wear out.
Required:
1. What is the financial advantage (disadvantage) per quarter ofdiscontinuing the Racing Bikes?
2. Should the production and sale of racing bikes bediscontinued?
3. Prepare a properly formatted segmented income statement thatwould be more useful to management in assessing the long-runprofitability of the various product lines.
