Question
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:
Sales: Total: 300,000
Variable manufacturing and selling expenses total: 120,000
contribution margin total: 180,000
fixed expenses:
advertising, traceable total: 30,000
depreciation of special equipment total: 23,000
salaries of product-line managers total: 35,000
allocated common fixed expenses* total: 60,000
total fixed expenses total: 148,000
net operating income (loss) total: 32,000
Dirt bikes sales: 90,000
dirt bikes variable manufacturing and selling expenses: 27,000
dirt bikes contribution margin: 63,000
dirt bike advertising, traceable: 10,000
dirt bike depreciation of special equipment: 6,000
dirt bike salaries of product-line managers 12,000
dirt bike allocated common fixed expenses* 18,000
dirtbike total fixed expenses: 46,000
dirt bike net operating income (loss): 17,000
Mountain bikes sales: 150,000
mountain bike variable manufacturing and selling expenses: 27,000
mountain bike contribution margin: 90,000
mountain bike advertising, traceable: 14,000
mountain bike depreciation of special equipment: 9,000
mountain bike salaries of product-line managers: 13,000
mountain bike allocated common fixed expenses* : 30,000
mountain bike total fixed expenses: 66,000
mountain bike net operating income (loss) : 24,000
Racing Bikes sales: 60,000
racing bikes variable manufacturing and selling expenses: 33,000
racing bikes contribution margin: 27,000
racing bikes advertising, traceable: 6,000
racing bikes depreciation of special equipment: 8,000
racing bikes salaries of product-line managers: 10,000
racing bikes allocated common fixed expenses* : 12,000
racing bikes total fixed expenses: 36,000
racing bikes total operating income (loss) : (9,000)
*Allocated on the basis of sales dollars.
Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out.
What is the financial disadvantage per quarter of discontinuing the racing bikes?
Sales: Total: 300,000
Variable manufacturing and selling expenses total: 120,000
contribution margin total: 180,000
fixed expenses:
advertising, traceable total: 30,000
depreciation of special equipment total: 23,000
salaries of product-line managers total: 35,000
allocated common fixed expenses* total: 60,000
total fixed expenses total: 148,000
net operating income (loss) total: 32,000
Dirt bikes sales: 90,000
dirt bikes variable manufacturing and selling expenses: 27,000
dirt bikes contribution margin: 63,000
dirt bike advertising, traceable: 10,000
dirt bike depreciation of special equipment: 6,000
dirt bike salaries of product-line managers 12,000
dirt bike allocated common fixed expenses* 18,000
dirtbike total fixed expenses: 46,000
dirt bike net operating income (loss): 17,000
Mountain bikes sales: 150,000
mountain bike variable manufacturing and selling expenses: 27,000
mountain bike contribution margin: 90,000
mountain bike advertising, traceable: 14,000
mountain bike depreciation of special equipment: 9,000
mountain bike salaries of product-line managers: 13,000
mountain bike allocated common fixed expenses* : 30,000
mountain bike total fixed expenses: 66,000
mountain bike net operating income (loss) : 24,000
Racing Bikes sales: 60,000
racing bikes variable manufacturing and selling expenses: 33,000
racing bikes contribution margin: 27,000
racing bikes advertising, traceable: 6,000
racing bikes depreciation of special equipment: 8,000
racing bikes salaries of product-line managers: 10,000
racing bikes allocated common fixed expenses* : 12,000
racing bikes total fixed expenses: 36,000
racing bikes total operating income (loss) : (9,000)
*Allocated on the basis of sales dollars.
Management is considering discontinuing the racing bikes. The special equipment used to produce racing bikes has no resale value and does not wear out.
What is the financial disadvantage per quarter of discontinuing the racing bikes?
Answers
Answered by
GPT-4o mini
To determine the financial disadvantage of discontinuing the racing bikes, we need to analyze the contribution margin and fixed expenses associated with the racing bikes separately from the overall summary.
### Contribution Margin of Racing Bikes:
- Contribution margin: \( \text{Sales} - \text{Variable expenses} \)
Given:
- Racing bikes sales = \( 60,000 \)
- Racing bikes variable expenses = \( 33,000 \)
\[
\text{Contribution margin} = 60,000 - 33,000 = 27,000
\]
### Fixed Expenses of Racing Bikes:
- The fixed expenses for the racing bikes include traceable advertising, depreciation, salaries of the product-line manager, and allocated common fixed expenses.
Given:
- Racing bike advertising, traceable = \( 6,000 \)
- Racing bike depreciation of special equipment (does not wear out and has no resale value) = \( 8,000 \)
- Racing bike salaries of product-line managers = \( 10,000 \)
- Racing bike allocated common fixed expenses = \( 12,000 \)
\[
\text{Total fixed expenses for racing bikes} = 6,000 + 8,000 + 10,000 + 12,000 = 36,000
\]
### Net Operating Income (Loss) of Racing Bikes:
- Given racing bikes total operating income = \( -9,000 \)
### Financial Impact of Discontinuing Racing Bikes:
When the racing bikes are discontinued, the company will lose the contribution margin they currently provide but will also save on their traceable fixed costs. The allocated common fixed costs will continue to exist regardless of whether racing bikes are discontinued, therefore these costs should not be considered as savings from losing the product line.
#### Net Effect Calculation:
- Contribution margin loss if discontinued: \( 27,000 \)
- Savings from discontinuing fixed expenses (traceable fixed costs only):
- \( 6,000 + 8,000 + 10,000 = 24,000 \) (No allocation as it does not include common fixed expenses)
\[
\text{Financial disadvantage} = \text{Contribution margin loss} - \text{Savings from fixed costs}
\]
\[
\text{Financial disadvantage} = 27,000 - 24,000 = 3,000
\]
### Conclusion:
The financial disadvantage per quarter of discontinuing the racing bikes is **$3,000**.
### Contribution Margin of Racing Bikes:
- Contribution margin: \( \text{Sales} - \text{Variable expenses} \)
Given:
- Racing bikes sales = \( 60,000 \)
- Racing bikes variable expenses = \( 33,000 \)
\[
\text{Contribution margin} = 60,000 - 33,000 = 27,000
\]
### Fixed Expenses of Racing Bikes:
- The fixed expenses for the racing bikes include traceable advertising, depreciation, salaries of the product-line manager, and allocated common fixed expenses.
Given:
- Racing bike advertising, traceable = \( 6,000 \)
- Racing bike depreciation of special equipment (does not wear out and has no resale value) = \( 8,000 \)
- Racing bike salaries of product-line managers = \( 10,000 \)
- Racing bike allocated common fixed expenses = \( 12,000 \)
\[
\text{Total fixed expenses for racing bikes} = 6,000 + 8,000 + 10,000 + 12,000 = 36,000
\]
### Net Operating Income (Loss) of Racing Bikes:
- Given racing bikes total operating income = \( -9,000 \)
### Financial Impact of Discontinuing Racing Bikes:
When the racing bikes are discontinued, the company will lose the contribution margin they currently provide but will also save on their traceable fixed costs. The allocated common fixed costs will continue to exist regardless of whether racing bikes are discontinued, therefore these costs should not be considered as savings from losing the product line.
#### Net Effect Calculation:
- Contribution margin loss if discontinued: \( 27,000 \)
- Savings from discontinuing fixed expenses (traceable fixed costs only):
- \( 6,000 + 8,000 + 10,000 = 24,000 \) (No allocation as it does not include common fixed expenses)
\[
\text{Financial disadvantage} = \text{Contribution margin loss} - \text{Savings from fixed costs}
\]
\[
\text{Financial disadvantage} = 27,000 - 24,000 = 3,000
\]
### Conclusion:
The financial disadvantage per quarter of discontinuing the racing bikes is **$3,000**.