Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2]

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	$	922,000	$	262,000	$	407,000	$	253,000
Variable manufacturing and selling expenses		473,000		119,000		203,000		151,000
Contribution margin		449,000		143,000		204,000		102,000
Fixed expenses:
Advertising, traceable		68,800		8,500		40,200		20,100
Depreciation of special equipment		44,000		20,200		7,900		15,900
Salaries of product-line managers		115,200		40,600		38,700		35,900
Allocated common fixed expenses*		184,400		52,400		81,400		50,600
Total fixed expenses		412,400		121,700		168,200		122,500
Net operating income (loss)	$	36,600	$	21,300	$	35,800	$	(20,500)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

       

1b.	Should production and sale of the racing bikes be discontinued?
	Yes No

  

2a.	Prepare a segmented income statement.

        

2b.	Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.
	Yes No

Answer 1

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	922000	669000	-253000
Variable manufacturing and selling expenses	473000	322000	151000
Contribution margin (loss)	449000	347000	-102000
Fixed expenses:
Advertising, traceable	68800	48700	20100
Depreciation on special equipment	44000	44000	0
Salaries of product manager	115200	79300	35900
Common allocated costs	184400	184400	0
Total fixed expenses	412400	356400	56000
Net operating income (loss)	36600	-9400	-46000
1b
No
2a
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922000	262000	407000	253000
Variable manufacturing and selling expenses	473000	119000	203000	151000
Contribution margin (loss)	449000	143000	204000	102000
Traceable fixed expenses:
Advertising, traceable	68800	8500	40200	20100
Depreciation on special equipment	44000	20200	7900	15900
Salaries of product manager	115200	40600	38700	35900
Total traceable fixed expenses	228000	69300	86800	71900
Product line segment margin	221000	73700	117200	30100
Common fixed expenses	184400
Net operating income (loss)	36600
2b
Yes