70.2K

Verified Solution

Link Copied!

The Regal Cycle Company manufactures three types of bicyclesa 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	$	922,000		$	266,000		$	404,000		$	252,000
Variable manufacturing and selling expenses		475,000			114,000			208,000			153,000
Contribution margin		447,000			152,000			196,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,300			40,900			20,900
Depreciation of special equipment		43,400			20,300			7,500			15,600
Salaries of product-line managers		114,500			41,000			38,500			35,000
Allocated common fixed expenses*		184,400			53,200			80,800			50,400
Total fixed expenses		412,400			122,800			167,700			121,900
Net operating income (loss)	$	34,600		$	29,200		$	28,300		$	(22,900)

*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.

Answer & Explanation Solved by verified expert

See Answer