question archive Dropping or Retaining a Segment [LO 7-21 The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike
Dropping or Retaining a Segment [LO 7-21 The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike
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Dropping or Retaining a Segment [LO 7-21 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: Dirt Bikes Mountain Bikes Racing Bikes Total $300,000 $90,000 $150,000 $60,000 120,000 180,000 27.000 63,000 60,000 90,000 33,000 27,000 30.000 10,000 14,000 6.000 23,000 6.000 9,000 8.000 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)..... "Allocated on the basis of sales dollars. 35,000 12,000 13,000 10,000 60.000 148.000 $ 32,000 18,000 46,000 $17,000 30.000 66.000 $ 24,000 12.000 36,000 $ (9,000) 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. EXERCISE 7-3 Make or Buy a Component [LO 7-3) Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 15,000 Units per Year Direct materials. Direct labor Variable manufacturing overhead. Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost .. $14 10 3 6 9 $42 $210,000 150,000 45,000 90,000 135,000 $630,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).
