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. How can a segmented income statement help in assessing the long-run profitability of product lines?
1. To calculate the financial advantage or disadvantage of discontinuing the racing bikes, we need to compare the total contribution margin of the racing bikes with the total fixed expenses allocated to them. By subtracting the fixed expenses from the contribution margin, we can determine the financial impact. In this case, the financial advantage per quarter of discontinuing the racing bikes is $6,000.
2. The decision to discontinue the production and sale of racing bikes should not be solely based on the financial advantage. Management needs to consider other factors such as the strategic importance of the product line, market demand, room for improvement, and long-term profitability. A comprehensive evaluation is essential before making a final decision.
3. A properly formatted segmented income statement provides a clear breakdown of sales, variable costs, contribution margin, fixed costs, and net operating income for each product line. This information helps management in assessing the long-run profitability of various product lines and making informed decisions about resource allocation and strategic planning.
Calculating Financial Advantage
Financial advantage (disadvantage) per quarter of discontinuing the racing bikes:
Total contribution margin of racing bikes = Sales - Variable manufacturing and selling expenses
= $150,000 - $90,000
= $60,000
Total fixed expenses allocated to racing bikes = Advertising + Depreciation of special equipment + Salaries of product-line managers
= $30,000 + $10,000 + $14,000
= $54,000
Financial advantage (disadvantage) = Contribution margin - Fixed expenses
= $60,000 - $54,000
= $6,000
Therefore, discontinuing the racing bikes would result in a financial advantage of $6,000 per quarter.
Decision Making
Determination of whether to discontinue the racing bikes:
In deciding whether to discontinue the racing bikes, management must consider the financial advantage along with strategic importance, market demand, improvement potential, and long-term profitability. A comprehensive evaluation is necessary for making a well-informed decision.
Segmented Income Statement
Utilizing a segmented income statement:
A properly designed segmented income statement provides a detailed breakdown of financial performance for each product line. It helps in assessing the long-run profitability of different product lines and aids management in resource allocation and strategic planning.
By analyzing the segmented income statement, management can identify areas of strength and weakness in the product lines, leading to better decision-making and improved overall financial performance.