HLST 1010 Lecture 16: Topics
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The Regal Cycle Company manufactures three types of bicyclesâa 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 | $ | 925,000 | $ | 264,000 | $ | 405,000 | $ | 256,000 | ||||
Variable manufacturing and selling expenses | 465,000 | 111,000 | 195,000 | 159,000 | ||||||||
Contribution margin | 460,000 | 153,000 | 210,000 | 97,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 69,600 | 8,600 | 40,100 | 20,900 | ||||||||
Depreciation of special equipment | 44,200 | 20,900 | 7,500 | 15,800 | ||||||||
Salaries of product-line managers | 113,500 | 40,000 | 38,400 | 35,100 | ||||||||
Allocated common fixed expenses* | 185,000 | 52,800 | 81,000 | 51,200 | ||||||||
Total fixed expenses | 412,300 | 122,300 | 167,000 | 123,000 | ||||||||
Net operating income (loss) | $ | 47,700 | $ | 30,700 | $ | 43,000 | $ | (26,000) | ||||
*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.