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	$	921,000		$	264,000		$	403,000		$	254,000
Variable manufacturing and selling expenses		464,000			116,000			191,000			157,000
Contribution margin		457,000			148,000			212,000			97,000
Fixed expenses:
Advertising, traceable		69,400			8,100			40,400			20,900
Depreciation of special equipment		43,400			20,900			7,300			15,200
Salaries of product-line managers		113,600			40,500			38,000			35,100
Allocated common fixed expenses*		184,200			52,800			80,600			50,800
Total fixed expenses		410,600			122,300			166,300			122,000
Net operating income (loss)	$	46,400		$	25,700		$	45,700		$	(25,000)

*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.

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

• Required 1
• Required 2
• Required 3

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

• Required 1
• Required 2
• Required 3

Should the production and sale of racing bikes be discontinued?

	Yes No

• Required 1
• Required 2
• Required 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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Answer 1

Ans:

1a .Computation of Total Financial Advantage / Disadvantage by Dropping Racing Bikes
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	$ 921,000.00	$ 667,000.00	$ -254,000.00
Variable Manufacturing And Selling Expenses	$ 464,000.00	$ 307,000.00	$ 157,000.00
Contribution Margin (Loss) (a)	$ 457,000.00	$ 360,000.00	$ -97,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,400.00	$ 48,500.00	$ 20,900.00
Depreciation On Special Equipment	$ 43,400.00	$ 43,400.00	$ 0.00
Salaries Of Product Manager	$ 113,600.00	$ 78,500.00	$ 35,100.00
Common Allocated Costs	$ 184,200.00	$ 184,200.00	$ 0.00
Total Fixed Expenses (b)	$ 410,600.00	$ 354,600.00	$ 56,000.00
Net Operating Income (Loss) (a-b)	$ 46,400.00	$ 5,400.00	$ -41,000.00
Financial Disadvantage for 41000 by dropping Racing Bikes
2. No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 921,000.00	$ 264,000.00	$ 403,000.00	$ 254,000.00
Variable Manufacturing And Selling Expenses	$ 464,000.00	$ 116,000.00	$ 191,000.00	$ 157,000.00
Contribution Margin (Loss) (a)	$ 457,000.00	$ 148,000.00	$ 212,000.00	$ 97,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,400.00	$ 8,100.00	$ 40,400.00	$ 20,900.00
Depreciation On Special Equipment	$ 43,400.00	$ 20,900.00	$ 7,300.00	$ 15,200.00
Salaries Of Product Manager	$ 113,600.00	$ 40,500.00	$ 38,000.00	$ 35,100.00
Total Traceable Fixed Expenses (b)	$ 226,400.00	$ 69,500.00	$ 85,700.00	$ 71,200.00
Product Line Segment Margin (a-)	$ 230,600.00	$ 78,500.00	$ 126,300.00	$ 25,800.00
Common Fixed Expenses	$ 184,200.00
Net Operating Income (Loss)	$ 46,400.00
3. Yes , Segmental income is more Useful.

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