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 $ 917,000 $ 262,000 $ 404,000 $ 251,000 Variable manufacturing and selling expenses 470,000 115,000 198,000 157,000 Contribution margin 447,000 147,000 206,000 94,000 Fixed expenses: Advertising, traceable 69,700 8,500 40,500 20,700 Depreciation of special equipment 44,000 20,600 7,900 15,500 Salaries of product-line managers 114,100 40,300 38,000 35,800 Allocated common fixed expenses* 183,400 52,400 80,800 50,200 Total fixed expenses 411,200 121,800 167,200 122,200 Net operating income (loss) $ 35,800 $ 25,200 $ 38,800 $ (28,200) *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 1

						total if	Difference
						racing bike
					Current	are
1)					total	dropped
	Sales				917,000	666000	-251,000
	Variable expenses				470,000	313000	157,000
	contribution margin (loss)				447,000	353000	-94,000
	fixed expenses
	Advertising,traceable				69,700	49000	20,700
	Depreciation on special equipment				44,000	44,000	0
	Salaries of product managers				114,100	78300	35,800
	common allocated costs				183,400	183,400	0
	total fixed expenses				411,200	354700	56,500
	Net operating income(loss)				35,800	-1700	-37,500
	Financial disadvantage per quarter				37,500
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				917,000	262,000	404,000	251,000
	variable manufacturing and selling expense				470,000	115,000	198,000	157,000
	contribution margin (loss)				447,000	147,000	206,000	94,000
	traceable fixed expenses
	advertising				69,700	8,500	40,500	20,700
	depreciation on special equipment				44,000	20,600	7,900	15,500
	salaries of the product line managers				114,100	40,300	38,000	35,800
	total traceable fixed expenses				227,800	69,400	86,400	72,000
	product line segment margin				219,200	77,600	119,600	22,000
	common fixed expenses				183,400
	net operating income(loss)				35,800