Reference no: EM132526328
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
BikesSales $925,000 $264,000 $404,000 $257,000
Variable manufacturing and selling expenses 466,000 115,000 195,000 156,000
Contribution margin 459,000 149,000 209,000 101,000
Fixed expenses:
Advertising, traceable 69,500 8,100 40,400 21,000
Depreciation of special equipment 43,200 20,900 7,100 15,200
Salaries of product-line managers 114,300 40,700 38,100 35,500
Allocated common fixed expenses 185,000 52,800 80,800 51,400
Total fixed expenses 412,000 122,500 166,400 123,100
Net operating income (loss) $ 47,000 $26,500 $42,600 $(22,100)
- 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. Prepare properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.