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 |
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Sales | $ | 924,000 | $ | 264,000 | $ | 407,000 | $ | 253,000 | ||||
Variable manufacturing and selling expenses | 477,000 | 115,000 | 209,000 | 153,000 | ||||||||
Contribution margin | 447,000 | 149,000 | 198,000 | 100,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,800 | 8,100 | 40,900 | 20,800 | ||||||||
44,100 | 20,700 | 7,800 | 15,600 | |||||||||
Salaries of product-line managers | 113,800 | 40,000 | 38,600 | 35,200 | ||||||||
Allocated common fixed expenses* | 184,800 | 52,800 | 81,400 | 50,600 | ||||||||
Total fixed expenses | 412,500 | 121,600 | 168,700 | 122,200 | ||||||||
Net operating income (loss) | $ | 34,500 | $ | 27,400 | $ | 29,300 | $ | (22,200) | ||||
*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.
REQUIRED 1
What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?
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REQUIRED 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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