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	$	929,000	$	265,000	$	405,000	$	259,000
Variable manufacturing and selling expenses		460,000		111,000		195,000		154,000
Contribution margin		469,000		154,000		210,000		105,000
Fixed expenses:
Advertising, traceable		69,500		8,800		40,400		20,300
Depreciation of special equipment		43,400		20,500		7,700		15,200
Salaries of product-line managers		116,700		40,900		38,900		36,900
Allocated common fixed expenses*		185,800		53,000		81,000		51,800
Total fixed expenses		415,400		123,200		168,000		124,200
Net operating income (loss)	$	53,600	$	30,800	$	42,000	$	(19,200)

*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:

1a.

What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 87,600 units per year is:

Direct materials	$	2.20
Direct labor	$	2.00
Variable manufacturing overhead	$	.70
Fixed manufacturing overhead	$	4.25
Variable selling and administrative expenses	$	1.10
Fixed selling and administrative expenses	$	1.00

The normal selling price is $20 per unit. The company’s capacity is 115,200 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $17.00 per unit. This order would not affect regular sales.

Required:

1.	If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the company’s total fixed costs.)

   

2.

Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places.)

Benoit Company produces three products, A, B, and C. Data concerning the three products follow (per unit):

	Product
	A				B				C
Selling price	$	60			$	40			$	50
Variable expenses:
Direct materials		18.00				12.00				3.50
Other variable expenses		18.00				18.00				31.50
Total variable expenses		36.00				30.00				35.00
Contribution margin	$	24.00			$	10.00			$	15.00
Contribution margin ratio		40	%			25	%			30	%

Demand for the company’s products is very strong, with far more orders each month than the company can produce with the available raw materials. The same material is used in each product. The material costs $7 per pound with a maximum of 4,400 pounds available each month.

Required:

a.	Compute contribution margin per pound of materials used. (Round your intermediate calculations and final answers to 2 decimal places.)

b.	Which orders would you advise the company to accept first, those for A, for B, or for C? Which orders second? Third?

      

    

Answer 1

Answer 1-a.
	Current Total	Total if Racing Bikes Are Dropped	Diference: Net Operating Income Inc. or (Dec.)
Sales	929,000	670,000	(259,000)
Variable Manufacturing & Selling Expenses	460,000	306,000	154,000
Contribution Margin	469,000	364,000	(105,000)
Fixed Expenses
Advertsing	69,500	49,200	20,300
Depreciation of Special Equipment	43,400	43,400	-
Salaries of Product-Line Managers	116,700	79,800	36,900
Allocated Common Fixed Expenses	185,800	185,200	600
Total Fixed Expenses	415,400	357,600	57,800
Net Operating Income (Loss)	53,600	6,400	(47,200)