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 $ 927,000 $ 264,000 $ 407,000 $ 256,000 Variable manufacturing and selling expenses 471,000 114,000 200,000 157,000 Contribution margin 456,000 150,000 207,000 99,000 Fixed expenses: Advertising, traceable 69,600 8,900 40,300 20,400 Depreciation of special equipment 43,900 20,700 7,300 15,900 Salaries of product-line managers 115,800 40,900 38,400 36,500 Allocated common fixed expenses* 185,400 52,800 81,400 51,200 Total fixed expenses 414,700 123,300 167,400 124,000 Net operating income (loss) $ 41,300 $ 26,700 $ 39,600 $ (25,000) *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.

Question

31-01-2020
Business

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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 $ 927,000 $ 264,000 $ 407,000 $ 256,000 Variable manufacturing and selling expenses 471,000 114,000 200,000 157,000 Contribution margin 456,000 150,000 207,000 99,000 Fixed expenses: Advertising, traceable 69,600 8,900 40,300 20,400 Depreciation of special equipment 43,900 20,700 7,300 15,900 Salaries of product-line managers 115,800 40,900 38,400 36,500 Allocated common fixed expenses* 185,400 52,800 81,400 51,200 Total fixed expenses 414,700 123,300 167,400 124,000 Net operating income (loss) $ 41,300 $ 26,700 $ 39,600 $ (25,000) *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.

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Adedokuntunde6 Adedokuntunde6 · Answer 1 · 2020-01-31T07:52:01+01:00

Answer: (1) From the income statement it is clear that the racing bike cannot meet its fixed cost because it cannot provide a contribution towards meeting the fixed cost (2) it should be discontinued since it cannot provide a contribution towards meeting its fixed cost (3)A Dirk bike has a profit of $26,700, A mountain bike has a profit of $39,600, A racing bike has a loss of ($25,000) Total profit for the product line is $41,300

Explanation:

Income statement

Dirk bike mountain bike. Racing bike. Total

$ $ $ $

Sales. 264,000. 407,000 256,000 927,000

Less :Variablecost 114,000. 200,000 157,000. 471,000

----------- -------------- ------------- ------------

Contribution margin 150,000 207,000 99,000 456,000

Less: Fixed cost

Fixed Advertising. 8,900. 40,300. 20,400 69,600

Depreciation of equipment 20,700 7,300 15,900 43,900

Salary of product line manager 40,900. 38,400 36,500 115,800

Allocated common fixed expenses 52,800 81,400 51,200. 185,400

----------- ------------- ---------- -------------

Total Fixed Expenses 123,300 167,400. 124,000 414,700

Net operating income(loss) 26,700 39,600 (25,000) 41,300

(1) From the income statement it is clear that racing bike cannot meet its fixed cost because it cannot provide contribution towards meeting its fixed cost

(2) it should be discontinued since it cannot provide a contribution towards meeting its fixed cost

(3) A Dirk bike has a profit of $26,700, A mountain bike has a profit of $39,600, A racing bike has a loss of ($25,000) Total profit for the product line is $41,300

anthougo anthougo · Answer 2 · 2021-10-18T17:48:29+02:00

1. The financial disadvantage per quarter if The Regal Cycle Company discontinues the production and sale of the Racing Bikes is $42,100 ($51,200 + $15,900 - $25,000).

The Regal Cycle Company will lose $26,200 being the operating income of the Racing Bikes segment in addition to $15,900 for the depreciation of the special equipment that has no resale value.

2. The production and sale of the racing bikes should not be discontinued by The Regal Cycle Company.

3. The Regal Cycle Company

Segmented Income Statement for the quarter

Total Dirt Bikes Mountain Racing

Bikes Bikes

Sales $ 927,000 $ 264,000 $ 407,000 $ 256,000

Variable manufacturing

and selling expenses 471,000 114,000 200,000 157,000

Contribution margin 456,000 150,000 207,000 99,000

Fixed expenses:

Advertising, traceable 69,600 8,900 40,300 20,400

Depreciation:

Special equipment 43,900 20,700 7,300 15,900

Salaries of Line Managers 115,800 40,900 38,400 36,500

Total traceable fixed costs 229,300 70,500 86,000 72,800

Operating income before

allocated fixed expenses 226,700 79,500 121,000 26,200

Allocated fixed expenses* 185,400 52,800 81,400 51,200

Net operating income (loss) $41,300 $ 26,700 $ 39,600 $ (25,000)

Thus, the Racing Bikes should continue to be produced and sold as it contributes to the offsetting of the allocated common fixed costs.

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