Exercise 13 - Exercise 13-2 Dropping or Retaining a Segment...

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Exercise 13-2 Dropping or Retaining a Segment [LO2] 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 $ 905,000 $ 269,000 $ 395,000 $ 241,000 Variable manufacturing and selling expenses 502,000 129,000 214,000 159,000 Contribution margin 403,000
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140,000 181,000 82,000 Fixed expenses: Advertising, traceable 69,900 8,400 40,900 20,600 Depreciation of special equipment 43,300 21,000 7,200
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15,100 Salaries of product-line managers 117,000 40,800 38,500 37,700 Allocated common fixed expenses* 181,500 52,400 80,900 48,200 Total fixed expenses 411,700 122,600 167,500 121,600 Net operating income (loss)
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$ (8,700) $ 17,400 $ 13,500 $ (39,600 ) *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. Requirement 1: (a) What is the amount of the change in net income if the racing bikes is dropped? (Input the amount as positive value. Omit the "$" sign in your response.) Decrease in net operating income $ 23,700 Feedback:
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Lost Contribution margin $ (82,000) Fixed costs that can be avoided: Advertising, traceable $ 20,600 Salary of the product line manager 37,700 58,300 Decrease in net operating income for the company as a whole $ (23,700) The depreciation of the special equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued; thus, they are not relevant to the decision.
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(b) Should the racing bikes program be discontinued? Your Answer: Choice Selected Correct Yes No Feedback: No, production and sale of the racing bikes should not be discontinued. If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $29,200 each quarter. Requirement 2: Recast the above data in a format that would be more usable to management in assessing the long-run profitability of the various product lines. (Enter all amounts as positive numbers except for Net Operating Income which should be indicated by a minus sign if the result is a loss. Omit the "$" sign in your response.) Total Dirt Bikes Mountain Bikes Racing Bikes
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Sales $ 905,000 $ 269,000 $ 395,000 $ 241,000 Variable manufacturing and selling expenses 502,000 129,000 214,000 159,000 Contribution margin 403,000 140,000 181,000 82,000 Traceable fixed expenses:
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Advertising 69,900 8,400 40,900 20,600 Depreciation of special equipment 43,300 21,000 7,200 15,100 Salaries of the product line managers 117,000 40,800 38,500 37,700 Total traceable fixed expenses 230,200 70,200 86,600 73,400 Product line segment margins
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$ 172,800 $ 69,800 $ 94,400 8,600 Common fixed expenses 181,500 Net operating income -8,700 Exercise 13-3 Make or Buy a Component [LO3]
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Troy Engines, Ltd., manufactures a variety of
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This note was uploaded on 10/17/2010 for the course ACCT 1234 taught by Professor Duck during the Spring '10 term at A.T. Still University.

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Exercise 13 - Exercise 13-2 Dropping or Retaining a Segment...

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