Question

he 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 $ 925,000 $ 267,000 $ 402,000 $ 256,000 Variable manufacturing and selling expenses 455,000 112,000 192,000 151,000 Contribution margin 470,000 155,000 210,000 105,000 Fixed expenses: Advertising, traceable 70,000 9,000 40,300 20,700 Depreciation of special equipment 43,700 20,600 7,400 15,700 Salaries of product-line managers 115,900 40,800 38,300 36,800 Allocated common fixed expenses* 185,000 53,400 80,400 51,200 Total fixed expenses 414,600 123,800 166,400 124,400 Net operating income (loss) $ 55,400 $ 31,200 $ 43,600 $ (19,400) *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

						total if	Difference
						racing bike
					Current	are
1)					total	dropped
	Sales				925,000	669000	-256,000
	Variable expenses				455,000	304000	151,000
	contribution margin (loss)				470,000	365000	-105,000
	fixed expenses
	Advertising,traceable				70,000	49300	20,700
	Depreciation on special equipment				43,700	43,700	0
	Salaries of product managers				115,900	79100	36,800
	common allocated costs				185,000	185,000	0
	total fixed expenses				414,600	357100	57,500
	Net operating income(loss)				55,400	7900	-47,500
	Financial disadvantage per quarter				47,500
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				925,000	267,000	402,000	256,000
	variable manufacturing and selling expense				455,000	112,000	192,000	151,000
	contribution margin (loss)				470,000	155,000	210,000	105,000
	traceable fixed expenses
	advertising				70,000	9,000	40,300	20,700
	depreciation on special equipment				43,700	20,600	7,400	15,700
	salaries of the product line managers				115,900	40,800	38,300	36,800
	total traceable fixed expenses				229,600	70,400	86,000	73,200
	product line segment margin				240,400	84,600	124,000	31,800
	common fixed expenses				185,000
	net operating income(loss)				55,400
2b)	yes