Question

he 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	$	929,000		$	270,000		$	405,000		$	254,000
Variable manufacturing and selling expenses		473,000			119,000			196,000			158,000
Contribution margin		456,000			151,000			209,000			96,000
Fixed expenses:
Advertising, traceable		69,600			8,300			40,400			20,900
Depreciation of special equipment		44,200			20,800			7,500			15,900
Salaries of product-line managers		115,000			40,500			38,600			35,900
Allocated common fixed expenses*		185,800			54,000			81,000			50,800
Total fixed expenses		414,600			123,600			167,500			123,500
Net operating income (loss)	$	41,400		$	27,400		$	41,500		$	(27,500)

*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

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				929,000	675000	-254,000
	Variable expenses				473,000	315000	158,000
	contribution margin (loss)				456,000	360000	-96,000
	fixed expenses
	Advertising,traceable				69,600	48700	20,900
	Depreciation on special equipment				44,200	44,200	0
	Salaries of product managers				115,000	79100	35,900
	common allocated costs				185,800	185,800	0
	total fixed expenses				414,600	357800	56,800
	Net operating income(loss)				41,400	2200	-39,200
	Net financial disadvantage			$39,200
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				929,000	270,000	405,000	254,000
	variable manufacturing and selling expense				473,000	119,000	196,000	158,000
	contribution margin (loss)				456,000	151,000	209,000	96,000
	traceable fixed expenses
	advertising				69,600	8,300	40,400	20,900
	depreciation on special equipment				44,200	20,800	7,500	15,900
	salaries of the product line managers				115,000	40,500	38,600	35,900
	total traceable fixed expenses				228,800	69,600	86,500	72,700
	product line segment margin				227,200	81,400	122,500	23,300
	common fixed expenses				185,800
	net operating income(loss)				41,400
2b)	yes