The Regal Cycle Company manufactures three types of bicycles a dirt bike, a mountain bike, and a...

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 $ 926,000 $ 266,000 $ 405,000 $ 255,000
Variable
manufacturing and selling expenses 471,000 116,000 202,000 153,000
Contribution margin 455,000 150,000 203,000 102,000
Fixed expenses:
Advertising, traceable 69,700 8,300 40,700 20,700
Depreciation of special equipment 42,900 20,200 7,600 15,100
Salaries of product-line managers 114,800 40,200 38,300 36,300
Allocated common fixed expenses* 185,200 53,200 81,000 51,000
Total fixed expenses 412,600 121,900 167,600 123,100
Net operating income (loss) $ 42,400 $ 28,100 $ 35,400 $ (21,000)

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?

1b. Should production and sale of the racing bikes be discontinued?

2a. Prepare a segmented income statement.

Relevant Costs of Dropping a Product:

The relevant costs that should be taken into account when calculating the financial effect of dropping a product must be different between the alternatives, that is it must be avoidable if the product is dropped.

Answer and Explanation:


1. a-

Loss of sales revenue $(255,000)
Saving in variable costs 153,000
Saving in fixed costs
Advertising traceable
avoidable so relevant
20,700
Depreciation of special equipment
sunk cost so irrelevant
0
Salaries of product-line managers
avoidable so relevant
36,300
Allocated common fixed expenses
Unavoidable so irrelevant
0
Net decrease in profit if racing bikes are discontinued $(45,000)


b- Racing bikes should not be discontinued, because profits will decrease if it is.


The Regal Cycle Company

Segmented income statement for the past quarter

Total Dirt Bikes Mountain Bikes Racing Bikes
Sales $926,000 $266,000 $405,000 $255,000
Variable manufacturing and selling expenses 471,000 116,000 202,000 153,000
Contribution margin $455,000 $150,000 $203,000 $102,000
Traceable Fixed expenses:
Advertising, traceable 69,700 8,300 40,700 20,700
Depreciation of special equipment 42,900 20,200 7,600 15,100
Salaries of product-line managers 114,800 40,200 38,300 36,300
Total traceable fixed expenses $227,400 $68,700 $86,600 $72,100
Segment margin $227,600 $81,300 $116,400 $29,900
Common fixed expenses 185,200
Net operating income (loss) $42,400



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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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