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 $ 917,000 $ 263,000 $ 401,000 $ 253,000 Variable manufacturing and selling expenses 469,000 115,000 197,000 157,000 Contribution margin 448,000 148,000 204,000 96,000 Fixed expenses: Advertising, traceable 69,700 8,900 40,200 20,600 Depreciation of special equipment 43,500 20,600 7,500 15,400 Salaries of product-line managers 116,600 40,800 39,000 36,800 Allocated common fixed expenses* 183,400 52,600 80,200 50,600 Total fixed expenses 413,200 122,900 166,900 123,400 Net operating income (loss) $ 34,800 $ 25,100 $ 37,100 $ (27,400) *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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	917000	664000	-253000
Variable manufacturing and selling expenses	469000	312000	157000
Contribution margin (loss)	448000	352000	-96000
Fixed expenses:
Advertising, traceable	69700	49100	20600
Depreciation on special equipment	43500	43500	0
Salaries of product manager	116600	79800	36800
Common allocated costs	183400	183400	0
Total fixed expenses	413200	355800	57400
Net operating income (loss)	34800	-3800	-38600
Financial (disadvantage) ($38600)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	917000	263000	401000	253000
Variable manufacturing and selling expenses	469000	115000	197000	157000
Contribution margin (loss)	448000	148000	204000	96000
Traceable fixed expenses:
Advertising, traceable	69700	8900	40200	20600
Depreciation on special equipment	43500	20600	7500	15400
Salaries of product manager	116600	40800	39000	36800
Total traceable fixed expenses	229800	70300	86700	72800
Product line segment margin	218200	77700	117300	23200
Common fixed expenses	183400
Net operating income (loss)	34800