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	$	919,000		$	263,000		$	402,000		$	254,000
Variable manufacturing and selling expenses		479,000			115,000			210,000			154,000
Contribution margin		440,000			148,000			192,000			100,000
Fixed expenses:
Advertising, traceable		69,800			8,600			40,800			20,400
Depreciation of special equipment		42,800			20,100			7,200			15,500
Salaries of product-line managers		116,200			40,300			39,000			36,900
Allocated common fixed expenses*		183,800			52,600			80,400			50,800
Total fixed expenses		412,600			121,600			167,400			123,600
Net operating income (loss)	$	27,400		$	26,400		$	24,600		$	(23,600)

*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.

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?

Yes or No

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

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,19,000	$       6,65,000	$     -2,54,000
	Variable manufacturing and selling expenses	$       4,79,000	$       3,25,000	$       1,54,000
	Contribution margin (loss)	$       4,40,000	$       3,40,000	$     -1,00,000
	Fixed expenses:
	Advertising, traceable	$           69,800	$           49,400	$           20,400
	Depreciation on special equipment	$           42,800	$           42,800	$                    -
	Salaries of product managers	$       1,16,200	$           79,300	$           36,900
	Allocated common expense	$       1,83,800	$       1,83,800	$                    -
	Total fixed expenses	$       4,12,600	$       3,55,300	$           57,300
	Net operating income (loss)	$           27,400	$         -15,300	$         -42,700
	Financial disadvantage = $42,700
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,19,000	$       2,63,000	$       4,02,000	$             2,54,000
	Variable manufacturing and selling expenses	$       4,79,000	$       1,15,000	$       2,10,000	$             1,54,000
	Contribution margin (loss)	$       4,40,000	$       1,48,000	$       1,92,000	$             1,00,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,800	$             8,600	$           40,800	$                20,400
	Depreciation on special equipment	$           42,800	$           20,100	$             7,200	$                15,500
	Salaries of product managers	$       1,16,200	$           40,300	$           39,000	$                36,900
	Total traceable fixed expenses	$       2,28,800	$           69,000	$           87,000	$                72,800
	Product line segment margin (loss)	$       2,11,200	$           79,000	$       1,05,000	$                27,200
	Allocated common fixed expense	$       1,83,800
	Net operating income (loss)	$           27,400

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