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 $ 925,000 $ 265,000 $ 402,000 $ 258,000 Variable manufacturing and selling expenses 476,000 115,000 205,000 156,000 Contribution margin 449,000 150,000 197,000 102,000 Fixed expenses: Advertising, traceable 69,500 8,700 40,500 20,300 Depreciation of special equipment 43,600 20,600 7,300 15,700 Salaries of product-line managers 116,200 40,700 38,700 36,800 Allocated common fixed expenses* 185,000 53,000 80,400 51,600 Total fixed expenses 414,300 123,000 166,900 124,400 Net operating income (loss) $ 34,700 $ 27,000 $ 30,100 $ (22,400) *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

Answer 1.

Financial advantage(disadvantage) = ($44,900)

	Current Total	Total if Racing Bikes are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales	$925,000	$667,000	($258,000)
Variable Manufacturing & Selling Expenses	$476,000	$320,000	$156,000
Contribution Margin (Loss)	$449,000	$347,000	($102,000)
Fixed Expenses:
Advertising, traceable	$69,500	$49,200	$20,300
Depreciation of Special Equipment	$43,600	$43,600	-
Salaries of Production Managers	$116,200	$79,400	$36,800
Allocated Common Fixed Expenses	$185,000	$185,000	-
Total Fixed Expenses	$413,900	$357,000	$57,100
Net Operating Income (Loss)	$35,100	($10,000)	($44,900)

Answer 2.

No, the production and sale of racing bikes should not be discontinued as it will cause financial disadvantage of 44,900.

Answer 3.

A properly formatted segmented income statement

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$925,000	$265,000	$402,000	$258,000
Variable Manufacturing & Selling Expenses	$476,000	$115,000	$205,000	$156,000
Contribution Margin (Loss)	$449,000	$150,000	$197,000	$102,000
Traceable Fixed Expenses:
Advertising	$69,500	$8,700	$40,500	$20,300
Depreciation of Special Equipment	$43,600	$20,600	$7,300	$15,700
Salaries of Product Line Managers	$116,200	$40,700	$38,700	$36,800
Total Traceable Fixed Expenses	$229,300	$70,000	$86,500	$72,800
Product Line Segment Margins	$219,700	$80,000	$110,500	$29,200
Common Fixed Expenses	$185,000
Net Operating Income (Loss)	$34,700