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	$	932,000		$	265,000		$	410,000		$	257,000
Variable manufacturing and selling expenses		475,000			111,000			205,000			159,000
Contribution margin		457,000			154,000			205,000			98,000
Fixed expenses:
Advertising, traceable		69,800			8,200			40,700			20,900
Depreciation of special equipment		43,000			20,700			7,200			15,100
Salaries of product-line managers		116,300			41,000			38,700			36,600
Allocated common fixed expenses*		186,400			53,000			82,000			51,400
Total fixed expenses		415,500			122,900			168,600			124,000
Net operating income (loss)	$	41,500		$	31,100		$	36,400		$	(26,000)

*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.

Answer 1

						total if	Difference
						racing bike
					Current	are
1)					total	dropped
	Sales				932,000	675000	-257,000
	Variable expenses				475,000	316000	159,000
	contribution margin (loss)				457,000	359000	-98,000
	fixed expenses
	Advertising,traceable				69,800	48900	20,900
	Depreciation on special equipment				43,000	43,000	0
	Salaries of product managers				116,300	79700	36,600
	common allocated costs				186,400	186,400	0
	total fixed expenses				415,500	358000	57,500
	Net operating income(loss)				41,500	1000	-40,500
	Financial disadvantage per quarter				40,500
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				932,000	265,000	410,000	257,000
	variable manufacturing and selling expense				475,000	111,000	205,000	159,000
	contribution margin (loss)				457,000	154,000	205,000	98,000
	traceable fixed expenses
	advertising				69,800	8,200	40,700	20,900
	depreciation on special equipment				43,000	20,700	7,200	15,100
	salaries of the product line managers				116,300	41,000	38,700	36,600
	total traceable fixed expenses				229,100	69,900	86,600	72,600
	product line segment margin				227,900	84,100	118,400	25,400
	common fixed expenses				186,400
	net operating income(loss)				41,500