Question

expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $ 929,000 $261,000 $ 409,000 $ 259,000 456,000 111,000 195,000 150,000 473,000 150,000 214,000 109,000 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) 69,400 8,200 41,000 20,200 43,900 20,900 7,500 15,500 115,000 40,900 38,100 185,80052, 20081,800 414,100 122,200 168,400 123,500 $ 58,900 $ 27,800 $ 45,600 $(14,500) *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?

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	929000	670000	-259000
Variable manufacturing and selling expenses	456000	306000	150000
Contribution margin (loss)	473000	364000	-109000
Fixed expenses:
Advertising, traceable	69400	49200	20200
Depreciation on special equipment	43900	43900	0
Salaries of product manager	115000	79000	36000
Common allocated costs	185800	185800	0
Total fixed expenses	414100	357900	56200
Net operating income (loss)	58900	6100	-52800
Financial (disadvantage) $(52800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	929000	261000	409000	259000
Variable manufacturing and selling expenses	456000	111000	195000	150000
Contribution margin (loss)	473000	150000	214000	109000
Traceable fixed expenses:
Advertising, traceable	69400	8200	41000	20200
Depreciation on special equipment	43900	20900	7500	15500
Salaries of product manager	115000	40900	38100	36000
Total traceable fixed expenses	228300	70000	86600	71700
Product line segment margin	244700	80000	127400	37300
Common fixed expenses	185800
Net operating income (loss)	58900
Question-2
1. Standard labor hours allowed	9850	=19700*(30/60)
2. Standard labor cost allowed	61070	=9850*6.20
3. Labor spending variance	3895 U	=64965-61070
4. Labor rate variance	1065 F	=64965-(10650*6.2)
Labor efficiency variance	4960 U	=6.2*(10650-9850)
5. Variable overhead rate variance	9585 U	=53250-(10650*4.1)
Variable overhead efficiency variance	3280 U	=4.1*(10650-9850)