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	$	927,000		$	262,000		$	407,000		$	258,000
Variable manufacturing and selling expenses		475,000			117,000			200,000			158,000
Contribution margin		452,000			145,000			207,000			100,000
Fixed expenses:
Advertising, traceable		69,400			8,200			40,300			20,900
Depreciation of special equipment		44,700			21,000			7,900			15,800
Salaries of product-line managers		114,400			40,100			38,700			35,600
Allocated common fixed expenses*		185,400			52,400			81,400			51,600
Total fixed expenses		413,900			121,700			168,300			123,900
Net operating income (loss)	$	38,100		$	23,300		$	38,700		$	(23,900)

*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

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?

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.

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

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				927,000	669,000	-258,000
Less: Variable cost				475,000	317,000	158,000
Contribution margin				452,000	352,000	-100,000
Less: Fixed cost
Advertisement				69,400	48,500	20,900
Depreciation				44,700	44,700	0
Salary of product line manager				114,400	78,800	35,600
Common Fixed cost				185,400	185,400	0
SEGMENT MARGIN				38,100	-5,400	-43,500
No, Racing Rike Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt	Mountain	Racing
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				927,000	262,000	407,000	258,000
Less: Variable cost				475,000	117,000	200,000	158,000
Contribution margin				452,000	145,000	207,000	100,000
Less: Traceable Expense
Advertisement				69,400	8,200	40,300	20,900
Depreciation				44,700	21,000	7,900	15,800
Salary of product line manager				114,400	40,100	38,700	35,600
Total Traecable expense				228,500	69,300	86,900	72,300
SEGMENT MARGIN				223,500	75,700	120,100	27,700
Less: Common Fixed expesne				185,400
Net Operating Income				38,100
Yes, it will give more usable information