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	$	927,000		$	267,000		$	404,000		$	256,000
Variable manufacturing and selling expenses		457,000			111,000			192,000			154,000
Contribution margin		470,000			156,000			212,000			102,000
Fixed expenses:
Advertising, traceable		69,200			8,300			40,700			20,200
Depreciation of special equipment		43,900			20,300			7,800			15,800
Salaries of product-line managers		113,900			40,200			38,700			35,000
Allocated common fixed expenses*		185,400			53,400			80,800			51,200
Total fixed expenses		412,400			122,200			168,000			122,200
Net operating income (loss)	$	57,600		$	33,800		$	44,000		$	(20,200)

*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 is complete but not entirely correct.

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

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What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

	Financial (disadvantage) per quarterselected answer correct $(20,200)selected answer incorrect

Answer 1

1a .Computation of Total Financial Advantage / Disadvantage by Dropping Racing Bikes
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	$ 927,000.00	$ 671,000.00	$ -256,000.00
Variable Manufacturing And Selling Expenses	$ 457,000.00	$ 303,000.00	$ 154,000.00
Contribution Margin (Loss) (a)	$ 470,000.00	$ 368,000.00	$ -102,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,200.00	$ 49,000.00	$ 20,200.00
Depreciation On Special Equipment	$ 43,900.00	$ 43,900.00	$ 0.00
Salaries Of Product Manager	$ 113,900.00	$ 78,900.00	$ 35,000.00
Common Allocated Costs	$ 185,400.00	$ 185,400.00	$ 0.00
Total Fixed Expenses (b)	$ 412,400.00	$ 357,200.00	$ 55,200.00
Net Operating Income (Loss) (a-b)	$ 57,600.00	$ 10,800.00	$ -46,800.00
Financial Disadvantage for 46800 by dropping Racing Bikes
2. No, Should not be discontinued
3.
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 927,000.00	$ 267,000.00	$ 404,000.00	$ 256,000.00
Variable Manufacturing And Selling Expenses	$ 457,000.00	$ 111,000.00	$ 192,000.00	$ 154,000.00
Contribution Margin (Loss) (a)	$ 470,000.00	$ 156,000.00	$ 212,000.00	$ 102,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,200.00	$ 8,300.00	$ 40,700.00	$ 20,200.00
Depreciation On Special Equipment	$ 43,900.00	$ 20,300.00	$ 7,800.00	$ 15,800.00
Salaries Of Product Manager	$ 113,900.00	$ 40,200.00	$ 38,700.00	$ 35,000.00
Total Traceable Fixed Expenses (b)	$ 227,000.00	$ 68,800.00	$ 87,200.00	$ 71,000.00
Product Line Segment Margin (a-)	$ 243,000.00	$ 87,200.00	$ 124,800.00	$ 31,000.00
Common Fixed Expenses	$ 185,400.00
Net Operating Income (Loss)	$ 57,600.00
3. Yes , Segmental income is more Useful.