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:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	921,000		$	267,000		$	403,000		$	251,000
Variable manufacturing and selling expenses		484,000			116,000			209,000			159,000
Contribution margin		437,000			151,000			194,000			92,000
Fixed expenses:
Advertising, traceable		69,700			8,400			40,600			20,700
Depreciation of special equipment		43,100			20,100			7,800			15,200
Salaries of product-line managers		114,900			40,500			38,900			35,500
Allocated common fixed expenses*		184,200			53,400			80,600			50,200
Total fixed expenses		411,900			122,400			167,900			121,600
Net operating income (loss)	$	25,100		$	28,600		$	26,100		$	(29,600)

*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.

Required:

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. 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.

Answer 1

--All working forms part of the answer

--Requirement 1

Contribution margin for Racing Bikes that would be lost (B)		$92,000
Fixed Costs that will be avoided if Racing Bike is discontinued:
Advertising, traceable	$20,700
Depreciation of special equipment	$15,200
Salaries of product-line managers	$35,500
Total Fixed Expenses avoided (A)		$71,400
Net Financial (Disadvantage) of discontinuing Racing Bikes (A - B)		($20,600)

--Requirement 2

NO, it should not be discontinued because Fixed cost avoided are LESS than Contribution margin lost, resulting in Financial Disadvantage.

--Requirement 3

	Total	Direct Bike	Mountain Bike	Racing Bikes
Sales	$921,000	$267,000	$403,000	$251,000
Variable manufacturing and selling expenses	$484,000	$116,000	$209,000	$159,000
Contribution margin	$437,000	$151,000	$194,000	$92,000
Tracable Fixed expenses:
Advertising, traceable	$69,700	$8,400	$40,600	$20,700
Depreciation of special equipment	$43,100	$20,100	$7,800	$15,200
Salaries of product-line managers	$114,900	$40,500	$38,900	$35,500
Total Traceable Fixed expenses	$227,700	$69,000	$87,300	$71,400
Segment Margin	$209,300	$82,000	$106,700	$20,600
Allocated Common Fixed expenses	$184,200
Net operating income (loss)	$25,100