60.1K

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	$ 919,000	$ 263,000	$ 402,000	$ 254,000
Variable manufacturing and selling expenses	470,000	113,000	207,000	150,000
Contribution margin	449,000	150,000	195,000	104,000
Fixed expenses:
Advertising, traceable	68,900	8,200	40,600	20,100
Depreciation of special equipment	44,300	20,900	7,900	15,500
Salaries of product-line managers	115,400	40,100	38,900	36,400
Allocated common fixed expenses*	183,800	52,600	80,400	50,800
Total fixed expenses	412,400	121,800	167,800	122,800
Net operating income (loss)	$ 36,600	$ 28,200	$ 27,200	$ (18,800)

*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