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
Bikes Mountain Bikes Racing
Bikes Sales $ 300,000 $ 90,000 $ 150,000 $ 60,000 Variable manufacturing andselling expenses 120,000 27,000 60,000 33,000 Contribution margin 180,000 63,000 90,000 27,000 Fixed expenses: Advertising, traceable 30,000 10,000 14,000 6,000 Depreciation of specialequipment 23,000 6,000 9,000 8,000 Salaries of product-linemanagers 35,000 12,000 13,000 10,000 Allocated common fixedexpenses* 60,000 18,000 30,000 12,000 Total fixed expenses 148,000 46,000 66,000 36,000 Net operating income (loss) $ 32,000 $ 17,000 $ 24,000 $ (9,000 )
*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:
1a. What is the impact on net operating income by discontinuingracing bikes? (Decreases should be indicated by a minussign.)
1b. Should production and sale of the racing bikes bediscontinued?
Yes No
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable tomanagement in assessing the long-run profitability of the variousproduct lines.
Yes No
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 Bikes | Mountain Bikes | Racing Bikes | ||||||||||||
| Sales | $ | 300,000 | $ | 90,000 | $ | 150,000 | $ | 60,000 | |||||||
| Variable manufacturing andselling expenses | 120,000 | 27,000 | 60,000 | 33,000 | |||||||||||
| Contribution margin | 180,000 | 63,000 | 90,000 | 27,000 | |||||||||||
| Fixed expenses: | |||||||||||||||
| Advertising, traceable | 30,000 | 10,000 | 14,000 | 6,000 | |||||||||||
| Depreciation of specialequipment | 23,000 | 6,000 | 9,000 | 8,000 | |||||||||||
| Salaries of product-linemanagers | 35,000 | 12,000 | 13,000 | 10,000 | |||||||||||
| Allocated common fixedexpenses* | 60,000 | 18,000 | 30,000 | 12,000 | |||||||||||
| Total fixed expenses | 148,000 | 46,000 | 66,000 | 36,000 | |||||||||||
| Net operating income (loss) | $ | 32,000 | $ | 17,000 | $ | 24,000 | $ | (9,000 | ) | ||||||
*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:
1a. What is the impact on net operating income by discontinuingracing bikes? (Decreases should be indicated by a minussign.)
1b. Should production and sale of the racing bikes bediscontinued?
| Yes | |
| No |
2a. Prepare a segmented income statement.
2b. Would a segmented income statement format be more usable tomanagement in assessing the long-run profitability of the variousproduct lines.
| Yes | |
| No |
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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 Bikes | Mountain Bikes | Racing Bikes | |||||||||
| Sales | $ | 928,000 | $ | 266,000 | $ | 404,000 | $ | 258,000 | ||||
| Variable manufacturing andselling expenses | 461,000 | 116,000 | 192,000 | 153,000 | ||||||||
| Contribution margin | 467,000 | 150,000 | 212,000 | 105,000 | ||||||||
| Fixed expenses: | ||||||||||||
| Advertising, traceable | 69,800 | 8,300 | 41,000 | 20,500 | ||||||||
| Depreciation of specialequipment | 43,700 | 20,700 | 7,300 | 15,700 | ||||||||
| Salaries of product-linemanagers | 115,800 | 40,800 | 38,700 | 36,300 | ||||||||
| Allocated common fixedexpenses* | 185,600 | 53,200 | 80,800 | 51,600 | ||||||||
| Total fixed expenses | 414,900 | 123,000 | 167,800 | 124,100 | ||||||||
| Net operating income (loss) | $ | 52,100 | $ | 27,000 | $ | 44,200 | $ | (19,100) | ||||
*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.
