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	$	933,000		$	265,000		$	409,000		$	259,000
Variable manufacturing and selling expenses		462,000			112,000			194,000			156,000
Contribution margin		471,000			153,000			215,000			103,000
Fixed expenses:
Advertising, traceable		69,300			8,300			40,100			20,900
Depreciation of special equipment		43,900			21,000			7,400			15,500
Salaries of product-line managers		114,600			40,900			38,000			35,700
Allocated common fixed expenses*		186,600			53,000			81,800			51,800
Total fixed expenses		414,400			123,200			167,300			123,900
Net operating income (loss)	$	56,600		$	29,800		$	47,700		$	(20,900)

*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

		Current	Total if	difference
		Total	Racing
			bikes drop
Sales		9,33,000	674,000	-259000
Varibale cost	462000	306000	156000
Contribution	471000	368000	-103000
Fixed expense
Advertising	69300	48,400	20900
Depreciation	43900	43900	0
Salaries		1,14,600	78900	35700
Allocated		186600	186600	0
total fixed expenses	414400	357,800	56,600
net operating income	56,600	10,200	-46,400
1b) Yes discontrinue
2a)	Segmented income statement
		Totals	Dirt bikes	mountain	Racing
Sales		933,000	265,000	409,000	259,000
Varibale cost	462,000	112,000	194,000	156,000
Contribution	471,000	153,000	215,000	103,000
Taceable fixed expe
Advertising	69,300	8,300	40,100	20,900
Depreciation	43,900	21,000	7,400	15,500
Salaries		114,600	40,900	38,000	35,700
total traceable	227,800	70,200	85,500	72,100
controllable margin	243,200	82,800	129,500	30,900
allocated fixed expe	186600
net operating income	44900

2b ) yes segmented income is more useful