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

$

267,000

$

403,000

$

258,000

Variable manufacturing and selling expenses

475,000

111,000

206,000

158,000

Contribution margin

453,000

156,000

197,000

100,000

Fixed expenses:

Advertising, traceable

69,200

8,600

40,300

20,300

Depreciation of special equipment

43,500

20,400

7,500

15,600

Salaries of product-line managers

115,100

40,100

38,800

36,200

Allocated common fixed expenses*

185,600

53,400

80,600

51,600

Total fixed expenses

413,400

122,500

167,200

123,700

Net operating income (loss)

$

39,600

$

33,500

$

29,800

$

(23,700)

*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

Computation of Financial Advantage/Disadvantage

	If Racing bike division is continued	If discontinued	Difference
Sales	928,000	670,000	-258,000
Variable cost	475,000	317,000	-158,000
Contribution	453,000	353,000	-100,000
Fixed costs:
Advertising	69,200	48,900	-20,300
Depreciation	43,500	43,500	Nil
Salaries	115,100	78,900	-36,200
Allocated Common costs	185,600	185,600	Nil
Total Fixed costs	413 400	356,900	-56 500
Net income	39,600	(3,900)	-43,500

Since there is financial Disadvantage, it is recommended to Continue the Production of racing bikes

3.

Income Statement ($)

	Dirt bike	Mountain bike	Racing bike	Total
Sales	267,000	403,000	258,000	928,000
Variable cost	111,000	206,000	158,000	475,000
Contribution	156,000	197,000	100,000	453,000
Advertising	8,600	40,300	20,300	69,200
Salaries	40,100	38,800	36,200	115,100
Depreciation	20,400	7,500	15,600	43,500
Total division income	86,900	110,400	27,900	225,200
Less: Untraceable fixed costs				185,600
Net Income				39,600