Financial Analysis of Regal Cycle Company
What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?
Should the production and sale of racing bikes be discontinued?
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.
The financial advantage of discontinuing the racing bikes is $63,000 per quarter.
Based on the data, the production and sale of racing bikes should be discontinued.
For a properly formatted segmented income statement, refer to the detailed explanation below.
Financial Analysis of Regal Cycle Company
Discontinuing the racing bikes would result in a financial advantage of $63,000 per quarter. This decision is based on a comparison of the contribution margin and traceable fixed expenses associated with the racing bikes.
The contribution margin for the racing bikes is -$9,000 per quarter, indicating that the current operation results in a loss. The traceable fixed expenses for the racing bikes, including advertising, depreciation of special equipment, and salaries of product-line managers, total $54,000 per quarter.
To calculate the financial advantage or disadvantage of discontinuing the racing bikes, we subtract the traceable fixed expenses from the contribution margin. In this case, the financial disadvantage per quarter of continuing to produce and sell the racing bikes is $9,000 (contribution margin) minus $54,000 (traceable fixed expenses), resulting in a net loss of $63,000.
Therefore, management should consider discontinuing the production and sale of racing bikes to improve the overall profitability of the company.