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	$	920,000		$	262,000		$	403,000		$	255,000
Variable manufacturing and selling expenses		479,000			112,000			208,000			159,000
Contribution margin		441,000			150,000			195,000			96,000
Fixed expenses:
Advertising, traceable		69,900			8,900			40,600			20,400
Depreciation of special equipment		44,100			20,900			7,600			15,600
Salaries of product-line managers		115,700			40,900			38,800			36,000
Allocated common fixed expenses*		184,000			52,400			80,600			51,000
Total fixed expenses		413,700			123,100			167,600			123,000
Net operating income (loss)	$	27,300		$	26,900		$	27,400		$	(27,000)

*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

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue			9,20,000	6,65,000	-2,55,000
Less: Variable cost			4,79,000	3,20,000	1,59,000
Contribution margin			4,41,000	3,45,000	-96,000
Less: Fixed cost
Advertisement			69,900	49,500	20,400
Depreciation			44,100	44,100	0
Salary of product line manager		1,15,700	79,700	36,000
Common Fixed cost			1,84,000	1,84,000	0
SEGMENT MARGIN			27,300	-12,300	-39,600
No, Racing Rike Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt	Mountain	Racing
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue			9,20,000	2,62,000	4,03,000	2,55,000
Less: Variable cost			4,79,000	1,12,000	2,08,000	1,59,000
Contribution margin			4,41,000	1,50,000	1,95,000	96,000
Less: Traceable Expense
Advertisement			69,900	8,900	40,600	20,400
Depreciation			44,100	20,900	7,600	15,600
Salary of product line manager		1,15,700	40,900	38,800	36,000
Total Traecable expense		2,29,700	70,700	87,000	72,000
SEGMENT MARGIN			2,11,300	79,300	1,08,000	24,000
Less: Common Fixed expesne		1,84,000
Net Operating Income		27,300