Question

Check 2 "Allocated on the basis of sales dollars. 56 66 points 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. eBook Hint Print References Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required) What is the financial advantage (disadvantage) per quarter of discontinuires the Racing bikes? Financial (disadvantage) per quarter Required 2 >

Answer 1

1) Current Total Total if Dropped Effect on net operating income ($252,000) [Racing Bike's share lost] $158,000 [Racing Bike's share decreased and saved] ($94,000) $924,000 $480,000 $444,000 $672,000 $322,000 $350,000 Sales Variable manufacturing and selling expens Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses $68,700 $44,200 $114,600 $184,800 $412,300 $48,600 $44,200 $78,700 $184,800 $356,300 $20,100 [Racing Bike's share decreased and saved] $0 [No effect even if dropped] $35,900 [Racing Bike's share decreased and saved] $0 [No effect even if dropped] $56,000 Net operating income (loss) $31,700 ($6,300) ($38,000) Therefore, discontinuing Racing Bikes would decrease NOI by $38000. 2) No. Production of Racing Bikes should not be discontinued as dropping decision results decrease in net operating income.

3) Dirt Bikes Current Total $924,000 $480,000 $444,000 $264,000 $116,000 $148,000 Mountain Racing Bikes Bikes $408,000 $252,000 $206,000 $158,000 $ 202,000 $94,000 Sales Variable manufacturing and sell. exps. Contribution margin Traceable Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Total Traceable Fixed expenses Product line segment margin Common fixed expenses Net operating income (loss) $68,700 $44,200 $114,600 $227,500 $216,500 $184,800 $31,700 $8,400 $20,900 $40,600 $69,900 $78,100 $40,200 $7,800 $38,100 $86,100 $115,900 $20,100 $15,500 $35,900 $71,500 $22,500 (Contribution margin - Traceable fixed exp.] Segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.