Reference no: EM132612191
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 $ 925,000 $265,000 $ 407,000 $ 253,000
Variable manufacturing and selling expenses 461,000 112,000 192,000 157,000
Contribution margin 464,000 153,000 215,000 96,000
Fixed expenses:
Advertising, traceable 69,100 8,600 40,100 20,400
Depreciation of special equipment 43,900 20,700 7,200 16,000
Salaries of product-line managers 115,500 40,300 38,600 36,600
Allocated common fixed expenses 185,000 53,000 81,400 50,600
Total fixed expenses 413,500 122,600 167,300 123,600
Net operating income (loss) $ 50,500 $ 30,400 $ 47,700 $ (27,600)
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:
Question 1. What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?
Question 2. Should the production and sale of racing bikes be discontinued?
Question 3. create properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.