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	$	929,000		$	266,000		$	407,000		$	256,000
Variable manufacturing and selling expenses		471,000			119,000			194,000			158,000
Contribution margin		458,000			147,000			213,000			98,000
Fixed expenses:
Advertising, traceable		69,300			8,500			40,300			20,500
Depreciation of special equipment		43,600			20,800			7,200			15,600
Salaries of product-line managers		114,700			40,700			38,500			35,500
Allocated common fixed expenses*		185,800			53,200			81,400			51,200
Total fixed expenses		413,400			123,200			167,400			122,800
Net operating income (loss)	$	44,600		$	23,800		$	45,600		$	(24,800)

*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				929,000	673000	-256,000
	Variable expenses				471,000	313000	158,000
	contribution margin (loss)				458,000	360000	-98,000
	fixed expenses
	Advertising,traceable				69,300	48800	20,500
	Depreciation on special equipment				43,600	43,600	0
	Salaries of product managers				114,700	79200	35,500
	common allocated costs				185,800	185,800	0
	total fixed expenses				413,400	357400	56,000
	Net operating income(loss)				44,600	2600	-42,000
	Financial disadvantage per quarter				42,000
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				929,000	266,000	407,000	256,000
	variable manufacturing and selling expense				471,000	119,000	194,000	158,000
	contribution margin (loss)				458,000	147,000	213,000	98,000
	traceable fixed expenses
	advertising				69,300	8,500	40,300	20,500
	depreciation on special equipment				43,600	20,800	7,200	15,600
	salaries of the product line managers				114,700	40,700	38,500	35,500
	total traceable fixed expenses				227,600	70,000	86,000	71,600
	product line segment margin				230,400	77,000	127,000	26,400
	common fixed expenses				185,800
	net operating income(loss)				44,600