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	$	918,000		$	267,000		$	400,000		$	251,000
Variable manufacturing and selling expenses		464,000			118,000			194,000			152,000
Contribution margin		454,000			149,000			206,000			99,000
Fixed expenses:
Advertising, traceable		69,500			8,400			40,800			20,300
Depreciation of special equipment		43,800			20,200			8,000			15,600
Salaries of product-line managers		115,600			40,000			38,700			36,900
Allocated common fixed expenses*		183,600			53,400			80,000			50,200
Total fixed expenses		412,500			122,000			167,500			123,000
Net operating income (loss)	$	41,500		$	27,000		$	38,500		$	(24,000)

*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

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				918,000	667,000	-251,000
Less: Variable cost				464,000	312,000	152,000
Contribution margin				454,000	355,000	-99,000
Less: Fixed cost
Advertisement				69,500	49,200	20,300
Depreciation				43,800	43,800	0
Salary of product line manager				115,600	78,700	36,900
Common Fixed cost				183,600	183,600	0
SEGMENT MARGIN				41,500	-300	-41,800
No, Racing Rike Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt	Mountain	Racing
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				918,000	267,000	400,000	251,000
Less: Variable cost				464,000	118,000	194,000	152,000
Contribution margin				454,000	149,000	206,000	99,000
Less: Traceable Expense
Advertisement				69,500	8,400	40,800	20,300
Depreciation				43,800	20,200	8,000	15,600
Salary of product line manager				115,600	40,000	38,700	36,900
Total Traecable expense				228,900	68,600	87,500	72,800
SEGMENT MARGIN				225,100	80,400	118,500	26,200
Less: Common Fixed expesne				183,600
Net Operating Income				41,500