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	$	930,000		$	268,000		$	407,000		$	255,000
Variable manufacturing and selling expenses		485,000			118,000			208,000			159,000
Contribution margin		445,000			150,000			199,000			96,000
Fixed expenses:
Advertising, traceable		69,800			8,400			40,600			20,800
Depreciation of special equipment		44,700			20,800			8,000			15,900
Salaries of product-line managers		115,200			40,700			38,600			35,900
Allocated common fixed expenses*		186,000			53,600			81,400			51,000
Total fixed expenses		415,700			123,500			168,600			123,600
Net operating income (loss)	$	29,300		$	26,500		$	30,400		$	(27,600)

*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.

For #3: (fill in blanks)

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) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Net operating income (loss) $0

Answer 1

1	Financial disadvantage	=	$         -39,300
	Workings:
1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,30,000	$       6,75,000	$     -2,55,000
	Variable manufacturing and selling expenses	$       4,85,000	$       3,26,000	$       1,59,000
	Contribution margin (loss)	$       4,45,000	$       3,49,000	$         -96,000
	Fixed expenses:
	Advertising, traceable	$           69,800	$           49,000	$           20,800
	Depreciation on special equipment	$           44,700	$           44,700	$                    -
	Salaries of product managers	$       1,15,200	$           79,300	$           35,900
	Allocated common expense	$       1,86,000	$       1,86,000	$                    -
	Total fixed expenses	$       4,15,700	$       3,59,000	$           56,700
	Net operating income (loss)	$           29,300	$         -10,000	$         -39,300

2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit

3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,30,000	$       2,68,000	$       4,07,000	$             2,55,000
	Variable manufacturing and selling expenses	$       4,85,000	$       1,18,000	$       2,08,000	$             1,59,000
	Contribution margin (loss)	$       4,45,000	$       1,50,000	$       1,99,000	$                96,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,800	$             8,400	$           40,600	$                20,800
	Depreciation on special equipment	$           44,700	$           20,800	$             8,000	$                15,900
	Salaries of product managers	$       1,15,200	$           40,700	$           38,600	$                35,900
	Total traceable fixed expenses	$       2,29,700	$           69,900	$           87,200	$                72,600
	Product line segment margin (loss)	$       2,15,300	$           80,100	$       1,11,800	$                23,400
	Allocated common fixed expense	$       1,86,000
	Net operating income (loss)	$           29,300