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	$	928,000		$	262,000		$	410,000		$	256,000
Variable manufacturing and selling expenses		478,000			113,000			207,000			158,000
Contribution margin		450,000			149,000			203,000			98,000
Fixed expenses:
Advertising, traceable		69,600			8,400			40,300			20,900
Depreciation of special equipment		43,700			20,200			7,700			15,800
Salaries of product-line managers		115,500			40,800			38,100			36,600
Allocated common fixed expenses*		185,600			52,400			82,000			51,200
Total fixed expenses		414,400			121,800			168,100			124,500
Net operating income (loss)	$	35,600		$	27,200		$	34,900		$	(26,500)

*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

Ans:

1 .Computation of Total Financial Advantage / Disadvantage by Dropping Racing Bikes
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	$ 928,000.00	$ 672,000.00	$ -256,000.00
Variable Manufacturing And Selling Expenses	$ 478,000.00	$ 320,000.00	$ 158,000.00
Contribution Margin (Loss) (a)	$ 450,000.00	$ 352,000.00	$ -98,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,600.00	$ 48,700.00	$ 20,900.00
Depreciation On Special Equipment	$ 43,700.00	$ 43,700.00	$ 0.00
Salaries Of Product Manager	$ 115,500.00	$ 78,900.00	$ 36,600.00
Common Allocated Costs	$ 185,600.00	$ 185,600.00	$ 0.00
Total Fixed Expenses (b)	$ 414,400.00	$ 356,900.00	$ 57,500.00
Net Operating Income (Loss) (a-b)	$ 35,600.00	$ -4,900.00	$ -40,500.00
Financial Disadvantage for 40500 by dropping Racing Bikes
2. No
3.
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 928,000.00	$ 262,000.00	$ 410,000.00	$ 256,000.00
Variable Manufacturing And Selling Expenses	$ 478,000.00	$ 113,000.00	$ 207,000.00	$ 158,000.00
Contribution Margin (Loss) (a)	$ 450,000.00	$ 149,000.00	$ 203,000.00	$ 98,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,600.00	$ 8,400.00	$ 40,300.00	$ 20,900.00
Depreciation On Special Equipment	$ 43,700.00	$ 20,200.00	$ 7,700.00	$ 15,800.00
Salaries Of Product Manager	$ 115,500.00	$ 40,800.00	$ 38,100.00	$ 36,600.00
Total Traceable Fixed Expenses (b)	$ 228,800.00	$ 69,400.00	$ 86,100.00	$ 73,300.00
Product Line Segment Margin (a-)	$ 221,200.00	$ 79,600.00	$ 116,900.00	$ 24,700.00
Common Fixed Expenses	$ 185,600.00
Net Operating Income (Loss)	$ 35,600.00
3. Yes , Segmental income is more Useful.

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