EXERCISE 12-2 Dropping or Retaining a Segment L012-2] 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: Dirt Bikes Total Mountain Bikes Racing Bikes $300,000 $90,000 $150,000 $60,000 120,000 180,000 27,000 63,000 60,000 90,000 33,000 27,000 10,000 14,000 6,000 Sales .......... Variable manufacturing and selling expenses.... Contribution margin Fixed expenses: Advertising, traceable ......... Depreciation of special equipment ........ Salaries of product-line managers Allocated common fixed expenses". Total fixed expenses ............ Net operating income (loss) ...... 30,000 23,000 6,000 9,000 8,000 35,000 12,000 13,000 10,000 60,000 148,000 $ 32,000 18,000 46,000 $17,000 30,000 66,000 $ 24,000 12,000 36,000 $ (9,000) *Allocated on the basis of sales dollars. Management is concerned about the continued losses shown by the racing bikes and wants a rec- ommendation 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. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. 2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.
Related questions
| 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.
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Exercise 10-2 Dropping or Retaining a Segment [LO10-2]
| 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 | $ | 915,000 | $ | 263,000 | $ | 402,000 | $ | 250,000 |
| Variable manufacturing and selling expenses | 471,000 | 113,000 | 208,000 | 150,000 | ||||
| Contribution margin | 444,000 | 150,000 | 194,000 | 100,000 | ||||
| Fixed expenses: | ||||||||
| Advertising, traceable | 69,400 | 8,200 | 40,800 | 20,400 | ||||
| Depreciation of special equipment | 44,600 | 21,000 | 7,900 | 15,700 | ||||
| Salaries of product-line managers | 114,700 | 40,800 | 38,700 | 35,200 | ||||
| Allocated common fixed expenses* | 183,000 | 52,600 | 80,400 | 50,000 | ||||
| Total fixed expenses | 411,700 | 122,600 | 167,800 | 121,300 | ||||
| Net operating income (loss) | $ | 32,300 | $ | 27,400 | $ | 26,200 | $ | (21,300) |
| *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: |
| 1a. | What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) |
| 1b. | Should production and sale of the racing bikes be discontinued? | ||||
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| 2a. | Prepare a segmented income statement. |
| 2b. | Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines. | ||||
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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 | $ | 925,000 | $ | 264,000 | $ | 405,000 | $ | 256,000 | ||||
| Variable manufacturing and selling expenses | 465,000 | 111,000 | 195,000 | 159,000 | ||||||||
| Contribution margin | 460,000 | 153,000 | 210,000 | 97,000 | ||||||||
| Fixed expenses: | ||||||||||||
| Advertising, traceable | 69,600 | 8,600 | 40,100 | 20,900 | ||||||||
| Depreciation of special equipment | 44,200 | 20,900 | 7,500 | 15,800 | ||||||||
| Salaries of product-line managers | 113,500 | 40,000 | 38,400 | 35,100 | ||||||||
| Allocated common fixed expenses* | 185,000 | 52,800 | 81,000 | 51,200 | ||||||||
| Total fixed expenses | 412,300 | 122,300 | 167,000 | 123,000 | ||||||||
| Net operating income (loss) | $ | 47,700 | $ | 30,700 | $ | 43,000 | $ | (26,000) | ||||
*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.
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.
