Regal Cycle Company makes three types of bicycles: an all-terrain bicycle, a mountain bike, and a racing
Question:
Regal Cycle Company makes three types of bicycles: an all-terrain bicycle, a mountain bike, and a racing bicycle. The data on sales and expenses for the last quarter are as follows:
Sales $930,000 $267,000. $406,000. $257,000
Variable manufacturing and selling expenses. 477,000 112,000 206,000 159,000
Contribution margin 453,000 155,000 200,000 98,000 Fixed expenses:
Advertising, traceable 69,500. 8,200 41,000 20,300
Depreciation of special equipment 43,700 20,700 7,200 15,800
Product line manager salaries 114,000. 40,100 38,900 35,000 Common fixed expenses assigned* 186,000 53,400 81,200 51,400
Total fixed expenses 413,200 122,400 168,300 122,500
Net operating income (loss) $39,800 $32,600 $31,700 (24,500)
*Assigned based on sales dollars.
Management is concerned about the continued losses shown by racing bikes and wants a recommendation on whether or not the line should be discontinued. The special equipment used to produce racing bicycles has no resale value and does not wear out.
Questions
1. What is the financial advantage (disadvantage) per quarter of discontinuing racing bicycles?
2. Should the production and sale of racing bicycles be discontinued?
3. Prepare a segmented income statement in the appropriate format that would be most useful to management in evaluating the long-term profitability of the various product lines.
Managerial Accounting
ISBN: 978-1259307416
16th edition
Authors: Ray Garrison, Eric Noreen, Peter Brewer