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Exercise 13-2 (Algo) Dropping or Retalning a Segment [L013-2] The Regal Cycle Company manufactures three types of bicycles-o dirt bike, a mountain bike, and a recing bike
Exercise 13-2 (Algo) Dropping or Retalning a Segment [L013-2] The Regal Cycle Company manufactures three types of bicycles-o dirt bike, a mountain bike, and a recing bike. Dots on sales and expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $ 914,03e $261,e2e $ 4e2,ese $ 251,220 465,820 115,000 199.000 151, ese 449, eee 145.000 203,888 103,eee Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product line managers Allocated common fixed expenses Total fixed expenses Net operating income (loss) 78,18e 8.68 44,28 20,78e 115,980 41,080 182,820 52, 220 413.ee 122,52e $ 36,00 $ 23,50 $ 48.780 20,80 7.788 15,820 38,888 36,180 80,480 sa, 20e 167,620 122,980 35,420 $(22,902) *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 hos no resale value and does not wear out. Required: 1. What is the financial advantage (disadvantage) per quarter of discontinuing the Rocing Bikes? 2. Should the production and sale of racing bikes be discontinued? 3. Prepare a properly formetted segmented income statement that would be more useful to menagement in assessing the long-run profitability of the verious 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? Regu Required 2 >
Expert Solution
1.
| Effect on net income | |
| Sales | -$251,000 |
| Variable manufacturing and selling expenses | 151,000 |
| Contribution margin | -100,000 |
| Avoidable fixed expenses: | |
| Advertsing, traceable | 20,800 |
| Salaries of product line managers | 36,100 |
| Total | -$43,100 |
Financial disadvantage = $43,100
2.
No.
3.
| Total | Dirt Bikes | Mountain Bikes | Racing Bikes | |
| Sales | $914,000 | $261,000 | $402,000 | $251,000 |
| Variable manufacturing and selling expenses | 465,000 | 115,000 | 199,000 | 151,000 |
| Contribution margin | 449,000 | 146,000 | 203,000 | 100,000 |
| Traceable fixed expenses: | ||||
| Advertsing, traceable | 70,100 | 8,600 | 40,700 | 20,800 |
| Depreciation of special equipment | 44,200 | 20,700 | 7,700 | 15,800 |
| Salaries of product line managers | 115,900 | 41,000 | 38,800 | 36,100 |
| Total Traceable fixed expenses | 230,200 | 70,300 | 87,200 | 72,700 |
| Segment margin | 218,800 | 75,700 | 115,800 | 27,300 |
| Common fixed expenses | 182,800 | |||
| Net operating income | $36,000 |
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