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	$	921,000		$	261,000		$	402,000		$	258,000
Variable manufacturing and selling expenses		477,000			118,000			208,000			151,000
Contribution margin		444,000			143,000			194,000			107,000
Fixed expenses:
Advertising, traceable		69,200			8,300			40,400			20,500
Depreciation of special equipment		43,100			20,200			7,200			15,700
Salaries of product-line managers		114,300			40,100			38,200			36,000
Allocated common fixed expenses*		184,200			52,200			80,400			51,600
Total fixed expenses		410,800			120,800			166,200			123,800
Net operating income (loss)	$	33,200		$	22,200		$	27,800		$	(16,800)

*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.

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				921,000	663000	-258,000
	Variable expenses				477,000	326000	151,000
	contribution margin (loss)				444,000	337000	-107,000
	fixed expenses
	Advertising,traceable				69,200	48700	20,500
	Depreciation on special equipment				43,100	43,100	0
	Salaries of product managers				114,300	78300	36,000
	common allocated costs				184,200	184,200	0
	total fixed expenses				410,800	354300	56,500
	Net operating income(loss)				33,200	-17300	-50,500
	Net financial disadvantage			$50,500
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				921,000	261,000	402,000	258,000
	variable manufacturing and selling expense				477,000	118,000	208,000	151,000
	contribution margin (loss)				444,000	143,000	194,000	107,000
	traceable fixed expenses
	advertising				69,200	8,300	40,400	20,500
	depreciation on special equipment				43,100	20,200	7,200	15,700
	salaries of the product line managers				114,300	40,100	38,200	36,000
	total traceable fixed expenses				226,600	68,600	85,800	72,200
	product line segment margin				217,400	74,400	108,200	34,800
	common fixed expenses				184,200
	net operating income(loss)				33,200
2b)	yes