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		$	264,000		$	403,000		$	254,000
Variable manufacturing and selling expenses		469,000			112,000			200,000			157,000
Contribution margin		452,000			152,000			203,000			97,000
Fixed expenses:
Advertising, traceable		69,200			8,700			40,300			20,200
Depreciation of special equipment		42,800			20,300			7,400			15,100
Salaries of product-line managers		114,300			40,200			38,900			35,200
Allocated common fixed expenses*		184,200			52,800			80,600			50,800
Total fixed expenses		410,500			122,000			167,200			121,300
Net operating income (loss)	$	41,500		$	30,000		$	35,800		$	(24,300)

*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				921,000	667000	-254,000
	Variable expenses				469,000	312000	157,000
	contribution margin (loss)				452,000	355000	-97,000
	fixed expenses
	Advertising,traceable				69,200	49000	20,200
	Depreciation on special equipment				42,800	42,800	0
	Salaries of product managers				114,300	79100	35,200
	common allocated costs				184,200	184,200	0
	total fixed expenses				410,500	355100	55,400
	Net operating income(loss)				41,500	-100	-41,600
	finacial disadvantage			41,600
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				921,000	264,000	403,000	254,000
	variable manufacturing and selling expense				469,000	112,000	200,000	157,000
	contribution margin (loss)				452,000	152,000	203,000	97,000
	traceable fixed expenses
	advertising				69,200	8,700	40,300	20,200
	depreciation on special equipment				42,800	20,300	7,400	15,100
	salaries of the product line managers				114,300	40,200	38,900	35,200
	total traceable fixed expenses				226,300	69,200	86,600	70,500
	product line segment margin				225,700	82,800	116,400	26,500
	common fixed expenses				184,200
	net operating income(loss)				41,500