Dirt Bikes Mountain Racing Bikes Bikes Sales Variable manufa

Dirt Bikes Mountain Racing Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $ 925,000 $262,000 $. 409,000 $ 254,000 460,000 112,000 192,000 156,000 98,000 465,000 150,000 217,0008 0 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 20,100 15,700 35,500 50,800 168,400120 $ 52,600 $ 28,100 $ 48,600 $(24,100) 40,300 7,400 38,900 81,800 68,900 8,500 43,600 20,500 114,90040,500 185,000 52,400 412,400 121,900 Total fixed expenses Net operating income (loss) 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 the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear 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 lon profitability of the various product lines Complete this question by entering your answers in the tabs below. Required 1 Required 2Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? inancial (disadvantage) per quarter

Solution

Answer:

1

We can calculate the Financial advantage/(disadvantage) per quarter of discontinuing Racing bikes as under

Current
Total

Total if Racing Bikes are driopped

Diffance in
net operating income
increse/ (decrese)

Sales

$925,000

$671,000

($254,000)

Variable manufacturing & selling expenses

$460,000

304000

$156,000

Contribution margin

$465,000

$367,000

($98,000)

Fixed Expenses

Advertising, traceable

$68,900

48800

$20,100

Depreciation of special equipment

$43,600

43600

$0

Salaries of product line managers

$114,900

79400

$35,500

Allocated common fixed expenses

$185,000

185000

$0

Total Fixed expenses

$412,400

$356,800

$55,600

Net operating income/(loss)

$52,600

$10,200

($42400)

As we can see from the above calculation that, company has Financial disadvantage per quarter of discontinuing Racing bikes by $42,400

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2

No,

Explanation to the answer:

company should not discontinue the production and sell of racing bikes because becuase dropping racing bike reduce the net operating income because of the higher fixed expenses allocation cost

____________________________________________________________________

3

Segmented Income Statement

Total

Dirt Bikes

Mountain Bikes

Racing Bikes

Sales

$925,000

$262,000

$409,000

$254,000

Variable manufacturing & selling expenses

$460,000

112000

192000

156000

Contribution margin (loss)

$465,000

$150,000

$217,000

$98,000

Traceable fixed expenses:

Advertising

$68,900

8500

40300

20100

Depreciation of special equipment

$43,600

20500

7400

15700

Salaries of product line managers

$114,900

40500

38900

35500

Total traceable fixed expenses

227400

69500

86600

71300

Product line segment Margin

$237,600

$80,500

$130,400

$26,700

common fixed expenses

$185,000

Net operating income (loss)

$52,600

	Current Total	Total if Racing Bikes are driopped	Diffance in net operating income increse/ (decrese)
Sales	$925,000	$671,000	($254,000)
Variable manufacturing & selling expenses	$460,000	304000	$156,000
Contribution margin	$465,000	$367,000	($98,000)
Fixed Expenses
Advertising, traceable	$68,900	48800	$20,100
Depreciation of special equipment	$43,600	43600	$0
Salaries of product line managers	$114,900	79400	$35,500
Allocated common fixed expenses	$185,000	185000	$0
Total Fixed expenses	$412,400	$356,800	$55,600
Net operating income/(loss)	$52,600	$10,200	($42400)