Question

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	$	922,000		$	265,000		$	406,000		$	251,000
Variable manufacturing and selling expenses		454,000			112,000			192,000			150,000
Contribution margin		468,000			153,000			214,000			101,000
Fixed expenses:
Advertising, traceable		69,400			8,200			40,500			20,700
Depreciation of special equipment		43,800			20,800			7,200			15,800
Salaries of product-line managers		115,300			40,100			38,500			36,700
Allocated common fixed expenses*		184,400			53,000			81,200			50,200
Total fixed expenses		412,900			122,100			167,400			123,400
Net operating income (loss)	$	55,100		$	30,900		$	46,600		$	(22,400)

*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?

Answer 1

Answer:- The financial disadvantage per quarter of discontinuing the Racing Bikes is $43600.

Explanation:-

Regal Cycle Company
Income statement- Racing Bikes
For the quarter ended
Particulars	Current Total	Drop Racing Bikes	Difference Net operating Income
			Increase/ (Decrease)
	$	$	$
Sales	922000	671000	-251000
Less:- Variable Expenses
Variable manufacturing & selling expenses	454000	304000	150000
Contribution Margin	468000	367000	-101000
Fixed Expenses:-		0	0
Advertising, traceable	69400	48700	20700
Depreciation of special equipment	43800	43800	0
Salary of product line manager	115300	78600	36700
Allocated common fixed expenses	184400	184400	0
Total fixed expenses	412900	355500	57400
Net operating Income (loss)	55100	11500	-43600