Question

Exercise 11-2 Dropping or Retaining a Segment [LO11-2]

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	$	930,000		$	270,000		$	407,000		$	253,000
Variable manufacturing and selling expenses		467,000			119,000			192,000			156,000
Contribution margin		463,000			151,000			215,000			97,000
Fixed expenses:
Advertising, traceable		69,400			8,600			40,300			20,500
Depreciation of special equipment		43,300			20,500			7,400			15,400
Salaries of product-line managers		114,100			40,100			38,600			35,400
Allocated common fixed expenses*		186,000			54,000			81,400			50,600
Total fixed expenses		412,800			123,200			167,700			121,900
Net operating income (loss)	$	50,200		$	27,800		$	47,300		$	(24,900)

*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?

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.

Complete this question by entering your answers in the tabs below.

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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				930,000	677000	-253,000
	Variable expenses				467,000	311000	156,000
	contribution margin (loss)				463,000	366000	-97,000
	fixed expenses
	Advertising,traceable				69,400	48900	20,500
	Depreciation on special equipment				43,300	43,200	0
	Salaries of product managers				114,100	78700	35,400
	common allocated costs				186,000	186,400	0
	total fixed expenses				412,800	357200	55,900
	Net operating income(loss)				50,200	8800	-41,100
	Net financial disadvantage			$41,100
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				930,000	270,000	407,000	253,000
	variable manufacturing and selling expense				467,000	119,000	192,000	156,000
	contribution margin (loss)				463,000	151,000	215,000	97,000
	traceable fixed expenses
	advertising				69,400	8,600	40,300	20,500
	depreciation on special equipment				43,300	20,500	7,400	15,400
	salaries of the product line managers				114,100	40,100	38,600	35,400
	total traceable fixed expenses				226,800	69,200	86,300	71,300
	product line segment margin				236,200	81,800	128,700	25,700
	common fixed expenses				186,000
	net operating income(loss)				50,200
2b)	yes