Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2]
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:
Total | Dirt Bikes |
Mountain Bikes | Racing Bikes |
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Sales | $ | 926,000 | $ | 265,000 | $ | 405,000 | $ | 256,000 | ||||
Variable manufacturing and selling expenses | 465,000 | 113,000 | 201,000 | 151,000 | ||||||||
Contribution margin | 461,000 | 152,000 | 204,000 | 105,000 | ||||||||
Fixed expenses: | ||||||||||||
Advertising, traceable | 70,200 | 8,600 | 40,800 | 20,800 | ||||||||
Depreciation of special equipment | 43,700 | 20,700 | 7,100 | 15,900 | ||||||||
Salaries of product-line managers | 114,000 | 40,600 | 38,100 | 35,300 | ||||||||
Allocated common fixed expenses* | 185,200 | 53,000 | 81,000 | 51,200 | ||||||||
Total fixed expenses | 413,100 | 122,900 | 167,000 | 123,200 | ||||||||
Net operating income (loss) | $ | 47,900 | $ | 29,100 | $ | 37,000 | $ | (18,200) | ||||
*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:
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.
What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
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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.
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