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 $ 930,000 $ 265,000 $ 407,000 $ 258,000
variable manufacturing and selling expenses 474,000 113,000 205,000 156,000
contribution margin 456,000 152,000 202,000 102,000
fixed expenses:
advertising, traceable 68,800 8,100 40,100 20,600
depreciation of special equipment 43,300 20,400 7,700 15,200
salaries of product-line managers 114,900 40,400 38,500 36,000
allocated common fixed expenses* 186,000 53,000 81,400 51,600
total fixed expenses 413,000 121,900 167,700 123,400
net operating income (loss) $ 43,000 $ 30,100 $ 34,300 $ (21,400)
*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.
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.
totals dirt bikes mountain bikes racing bikes
contribution margin (loss)
traceable fixed expenses:
total traceable fixed expenses
product line segment margin (loss)
net operating income (loss)
required 2
required 3