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 Direct Bikes Mountain Bikes Racing BIkes
Sales $926,000 $262,000 $406,000 $258,000
Variable manufacturing and selling expenses 474,000 112,000 202,000 160,000
Contirubtion margin 452,000 150,000 204,000 98,000
Fixed expenses:
Advertising, traceable 70,600 8,900 41,000 20,700
Depreciation of special equipment 43,500 20,800 7,200 15,500
Salaries of product-line managers 114,600 41,000 38,100 35,500
Allocated common fixed expenses* 185,200 52,400 81,200 51,600
Total fixed expenses 413,900 123,100 167,500 123,300
Net operating income (loss) $38,100 $26,900 $36,500 $(25,300)

(*)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.)

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

2a. Prepare a segmented income statement

b. Would a segmented income statement format be more useful to management in assessing the long-run profitability of the various product lines

Relevant Costing

Relevant costing can be used to assess the profitability of a segment (or department) and hence decide if a segment should continue or be eliminated. When calculating the profit of a segment, allocated common costs should not be included as these costs will not change regardless of the department being eliminated or continuing its operations. The quantitative decision criteria in deciding whether a department should be eliminated is whether revenues generated by a department are in excess of all relevant costs of that department.

Answer and Explanation:

1a.

Impact on operating income = loss of contribution margin - savings in advertising - savings in salaries of product line managers = 98,000 - 20,700 - 35,500 = $41,800 decrease

1b.

No. The production and sale of the racing bike line should not be discontinued. Discontinuing of the racing bike line will result in a loss of $41,800.

2a.

Total Direct Bikes Mountain Bikes Racing BIkes
Sales $926,000 $262,000 $406,000 $258,000
Variable manufacturing and selling expenses 474,000 112,000 202,000 160,000
Contribution margin 452,000 150,000 204,000 98,000
Traceable Fixed expenses:
Advertising, traceable 70,600 8,900 41,000 20,700
Depreciation of special equipment 43,500 20,800 7,200 15,500
Salaries of product-line managers 114,600 41,000 38,100 35,500
Total traceable fixed expense 228,700 70,700 86,300 71,700
Segment Margin 223,300 79,300 117,700 26,300
Allocated common fixed expenses 185,200
Net operating income $38,100

2b.

A segmented income statement will be useful since it shows direct segment margin that is attributable to a department.


Learn more about this topic:

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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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