Managerial Accounting: E13-2 The Regal Cycle Company manufactures three types

Managerial Accounting 
E13-2 Dropping or Retaining a Segment 
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 300,000 90,000 150,000 60,000 
Variable manufacturing and selling expenses 120,000 27,000 60,000 33,000 
Contribution margin 180,000 63,000 90,000 27,000 
Fixed expenses: 
  Advertising, traceable 30,000 10,000 14,000 6,000 
  Depreciation of special equipment 23,000 6,000 9,000 8,000 
  Salaries of product-line managers 35,000 12,000 13,000 10,000 
  Allocated common fixed expenses* 60,000 18,000 30,000 12,000 
Total fixed expenses 148,000 46,000 66,000 36,000 
Net operating income (loss) $32,000 $17,000 $24,000 $(9,000)
*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. Should production and sale of the racing bikes be discontinued? Explain. Show computations to support your answer. 
2. Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines.
Powered by