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Accounting

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1.Stone, Inc., budgets the following amounts for its Buildings & Grounds and Computer Services Departments in servicing each other and the two manufacturing divisions of Signs and Mailers:

	Used By
Supplied By	Building & Grounds	Computer Services	Signs	Mailers
Buildings & Grounds	—	0.20	0.60	0.20
Computer Services	0.15	—	0.30	0.55

If you are using the step down method to allocate support department costs which department(s) would you allocate the costs from first:

	a.	Mailers and Signs
	b.	Building and Grounds and Computer Services
	c.	Building and Grounds
	d.	Computer Services

 

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
Sales	$	929,000		$	267,000		$	405,000		$	257,000
Variable manufacturing and selling expenses		470,000			110,000			205,000			155,000
Contribution margin		459,000			157,000			200,000			102,000
Fixed expenses:
Advertising, traceable		69,400			8,500			40,400			20,500
Depreciation of special equipment		43,800			21,000			7,500			15,300
Salaries of product-line managers		115,600			40,800			38,300			36,500
Allocated common fixed expenses*		185,800			53,400			81,000			51,400
Total fixed expenses		414,600			123,700			167,200			123,700
Net operating income (loss)	$	44,400		$	33,300		$	32,800		$	(21,700)

*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.

Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Financial advantage per quarter
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. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 0 Contribution margin (loss) Traceable fixed expenses: 0 0 0 0 Total traceable fixed expenses Product line segment margin (loss) 0 $ 0 0 $ 0 Net operating income (loss) $ $ 0

3.A music promoter has had an offer to bring a famous musical group from England to Australia, as part of its world tour to promote its new album. The music promoter has done smaller tours previously, but nothing on the scale proposed by the manager of this famous group, the tour will cost several million dollars, but is likely to have revenue which will result in substantial profits for those involved. The promoter has some contacts at a national radio station which can promote the tour, and there is at least one financier who is interested in financing the tour in return of course for a share of the revenue from the tour. The promoter is calling for a meeting of the different interested parties, he is not sure what business organisation would be best to manage and conduct the proposed tour, particularly as it is going to involve various diverse entities, each with their own separate business interests.

Explain: • The options open to the different parties in what business structure they might use to promote the tour.