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 $ 927,000 $ 266,000 $ 409,000 $ 252,000 Variable manufacturing and selling expenses 471,000 111,000 202,000 158,000 Contribution margin 456,000 155,000 207,000 94,000 Fixed expenses: Advertising, traceable 70,200 8,900 40,800 20,500 Depreciation of special equipment 44,100 20,600 8,000 15,500 Salaries of product-line managers 114,600 40,400 38,400 35,800 Allocated common fixed expenses* 185,400 53,200 81,800 50,400 Total fixed expenses 414,300 123,100 169,000 122,200 Net operating income (loss) $ 41,700 $ 31,900 $ 38,000 $ (28,200) *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.

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	$	927,000		$	266,000	$	409,000	$	252,000
Variable manufacturing and selling expenses		471,000			111,000		202,000		158,000
Contribution margin		456,000			155,000		207,000		94,000
Fixed expenses:
Advertising, traceable		70,200			8,900		40,800		20,500
Depreciation of special equipment		44,100			20,600		8,000		15,500
Salaries of product-line managers		114,600			40,400		38,400		35,800
Allocated common fixed expenses*		185,400			53,200		81,800		50,400
Total fixed expenses		414,300			123,100		169,000		122,200
Net operating income (loss)	$	41,700		$	31,900	$	38,000	$	(28,200)

*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.

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes


Contribution margin (loss)
Traceable fixed expenses:



Total traceable fixed expenses
Product line segment margin (loss)
Net Operating Income (loss)

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