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 $ 922,000 $ 264,000 $ 402,000 $ 256,000 Variable manufacturing and selling expenses 474,000 117,000 205,000 152,000 Contribution margin 448,000 147,000 197,000 104,000 Fixed expenses: Advertising, traceable 69,300 8,600 40,300 20,400 Depreciation of special equipment 43,600 20,400 7,700 15,500 Salaries of product-line managers 114,800 40,600 38,500 35,700 Allocated common fixed expenses* 184,400 52,800 80,400 51,200 Total fixed expenses 412,100 122,400 166,900 122,800 Net operating income (loss) $ 35,900 $ 24,600 $ 30,100 $ (18,800) *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
Sales	$        9,22,000	$       6,66,000	$       -2,56,000
Variable manufacturing and selling expenses	$        4,74,000	$       3,22,000	$         1,52,000
Contribution Margin	$        4,48,000	$       3,44,000	$       -1,04,000
Fixed Expenses
Advertising	$            69,300	$          48,900	$            20,400
Depreciation of special equipment	$            43,600	$          43,600	$                     -
Salaries of production line managers	$        1,14,800	$          79,100	$            35,700
Allocated Common Fixed Expenses	$        1,84,400	$       1,84,400	$                     -
Total Fixed Expenses	$        4,12,100	$       3,56,000	$            56,100
Net Operating Income (Loss)	$            35,900	$        -12,000	$           -47,900

Financial Disadvantage = ($47900)

2. No, racing bikes should not be discontinued

3.

	Current Total	Dirt Bikes	Moutain Bikes	Racing Bikes
Sales	$        9,22,000	$       2,64,000	$         4,02,000	$       2,56,000
Variable manufacturing and selling expenses	$        4,74,000	$       1,17,000	$         2,05,000	$       1,52,000
Contribution Margin	$        4,48,000	$       1,47,000	$         1,97,000	$       1,04,000
Traceable Fixed Expenses
Advertising	$            69,300	$            8,600	$            40,300	$          20,400
Depreciation of special equipment	$            43,600	$          20,400	$              7,700	$          15,500
Salaries of production line managers	$        1,14,800	$          40,600	$            38,500	$          35,700
Total Fixed Expenses	$        2,27,700	$          69,600	$            86,500	$          71,600
Segment Margin	$        2,20,300	$          77,400	$         1,10,500	$          32,400
Common Fixed Expenses	$        1,84,400
Net Operating Income (Loss)	$            35,900