EXERCISE $12-2$ Dropping or Retaining a Segment LO$12-2$

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:

"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. EXERCISE $12-3$ Make or Buy Decision LO$12-3$

Troy Engines, Ltd$.,$ manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd$.,$ for a cost of $\backslash (\backslash$$ $35\backslash )$ per unit. To evaluate this offer, Troy Engines, Ltd$.,$ has gathered the following information relating to its own cost of producing the carburetor internally:

$\backslash$begin$\{$tabular$\}\{|$c$|$c$|$c$|\}$

$\backslash$hline & $\backslash$begin$\{$tabular$\}\{$l$\}$

Per $\backslash \backslash$

Unit

$\backslash$end$\{$tabular$\}$ & $15,000$ Units per Year $\backslash \backslash$

$\backslash$hline Direct materials $.$ & $\backslash$$$14$ & $\backslash$$$210,000\backslash \backslash$

$\backslash$hline Direct labor & $10$ & $150,000\backslash \backslash$

$\backslash$hline Variable manufacturing overhead & $3$ & $45,000\backslash \backslash$

$\backslash$hline Fixed manufacturing overhead, traceable & $\backslash (6*\backslash )$ & $90,000\backslash \backslash$

$\backslash$hline Fixed manufacturing overhead, allocated & $9$ & $135,000\backslash \backslash$

$\backslash$hline Total cost $.$ & $\backslash$$$42$ & $\backslash$$$630,000\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$

Required:

$1.$ Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage $($disadvantage$)$ of buying $15,000$ carburetors from the outside supplier?

$2.$ Should the outside supplier's offer be accepted?

$3.$ Suppose that if the carburetors were purchased, Troy Engines, Ltd$.,$ could use the freed capacity to launch a new product. The segment margin of the new product would be $\backslash (\backslash$$ $150,000\backslash )$ per year. Given this new assumption, what would be financial advantage $($disadvantage$)$ of buying $15,000$ carburetors from the outside supplier?

$4.$ Given the new assumption in requirement $3,$ should the outside supplier's offer be accepted? EXERCISE $12-4$ Special Order Decision LO$12-4$

Imperial Jewelers manufactures and sells a gold bracelet for $\backslash (\backslash$$ $189\mathrm{.}95\backslash ).$ The company's accounting system says that the unit product cost for this bracelet is $\backslash (\backslash$$ $149\mathrm{.}00\backslash )$ as shown below:

The members of a wedding party have approached Imperial Jewelers about buying $20$ of these gold bracelets for the discounted price of $\backslash (\backslash$$ $169\mathrm{.}95\backslash )$ each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $\backslash (\backslash$$ $250\backslash )$ and that would increase the direct materials cost per bracelet by $\backslash (\backslash$$ $2\mathrm{.}00\backslash ).$ The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $\backslash (\backslash$$ $4\mathrm{.}00\backslash )$ of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party's order using its existing manufacturing capacity.

Required:

$1.$ What is the financial advantage $($disadvantage$)$ of accepting the special order from the wedding party?

$2.$ Should the company accept the special order?