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	$	926,000		$	268,000		$	402,000		$	256,000
Variable manufacturing and selling expenses		472,000			115,000			200,000			157,000
Contribution margin		454,000			153,000			202,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,900			40,200			21,000
Depreciation of special equipment		43,300			20,400			7,300			15,600
Salaries of product-line managers		115,200			40,600			38,600			36,000
Allocated common fixed expenses*		185,200			53,600			80,400			51,200
Total fixed expenses		413,800			123,500			166,500			123,800
Net operating income (loss)	$	40,200		$	29,500		$	35,500		$	(24,800)

*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.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	926000	670000	-256000
Variable manufacturing and selling expenses	472000	315000	157000
Contribution margin (loss)	454000	355000	-99000
Fixed expenses:
Advertising, traceable	70100	49100	21000
Depreciation on special equipment	43300	43300	0
Salaries of product managers	115200	79200	36000
Allocated common fixed expenses	185200	185200	0
Total fixed expenses	413800	356800	57000
Net operating income (loss)	40200	-1800	-42000

2. No

The production and sale of the racing bikes should not be discontinued since it will result in a financial disadvantage of $42000.

3.

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	926000	268000	402000	256000
Variable manufacturing and selling expenses	472000	115000	200000	157000
Contribution margin (loss)	454000	153000	202000	99000
Traceable fixed expenses:
Advertising	70100	8900	40200	21000
Depreciation on special equipment	43300	20400	7300	15600
Salaries of product managers	115200	40600	38600	36000
Total traceable fixed expenses	228600	69900	86100	72600
Segment operating income	225400	83100	115900	26400
Common fixed expenses	185200
Net operating income (loss) $	40200