Question

Sales $ 929,000 $ 264,000 $ 406,000 $ 259,000 Variable manufacturing and selling expenses 478,000 114,000 206,000 158,000 Contribution margin 451,000 150,000 200,000 101,000 Fixed expenses: Advertising, traceable 69,300 8,300 40,600 20,400 Depreciation of special equipment 42,900 20,300 7,200 15,400 Salaries of product-line managers 115,700 40,100 38,900 36,700 Allocated common fixed expenses* 185,800 52,800 81,200 51,800 Total fixed expenses 413,700 121,500 167,900 124,300 Net operating income (loss) $ 37,300 $ 28,500 $ 32,100 $ (23,300) 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?

Answer 1

Answer:

Although the racing bikes is making a loss of $(23,300), by discontinuing the Racing Bikes, it will create financial disadvantage of $(101,000)

Explanation:

The financial advantages/(disadvantages) from discontinuing the Racing Bikes production is calculated as:

Plus: Cost saving = Variable contribution margin = $158,000

Less: Revenue deduction from not selling Racing Bikes = $259,000

Advantages/(Disadvantages)                                                $(101,000)

In other words, by stopping Racing Bikes - a business line having positive Contribution Margin of $101,000, the company does not gain any further fixed cost saving or recovery of the sales of machines/ equipment used only for the Racing Bikes production, the discontinue will create a disadvantage equal to the contribution margin of the Racing Bike business line.