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 $ 934,000 $ 267,000 $ 409,000 $ 258,000 Variable manufacturing and selling expenses 466,000 114,000 200,000 152,000 Contribution margin 468,000 153,000 209,000 106,000 Fixed expenses: Advertising, traceable 69,300 8,400 40,200 20,700 Depreciation of special equipment 43,700 20,700 7,600 15,400 Salaries of product-line managers 114,400 40,200 38,400 35,800 Allocated common fixed expenses* 186,800 53,400 81,800 51,600 Total fixed expenses 414,200 122,700 168,000 123,500 Net operating income (loss) $ 53,800 $ 30,300 $ 41,000 $ (17,500) *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	$ 934,000.00	$ 676,000.00	$ -258,000.00
Variable Manufacturing And Selling Expenses	$ 466,000.00	$ 314,000.00	$ 152,000.00
Contribution Margin (Loss) (a)	$ 468,000.00	$ 362,000.00	$ -106,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,300.00	$ 48,600.00	$ 20,700.00
Depreciation On Special Equipment	$ 43,700.00	$ 43,700.00	$ 0.00
Salaries Of Product Manager	$ 114,400.00	$ 78,600.00	$ 35,800.00
Common Allocated Costs	$ 186,800.00	$ 186,800.00	$ 0.00
Total Fixed Expenses (b)	$ 414,200.00	$ 357,700.00	$ 56,500.00
Net Operating Income (Loss) (a-b)	$ 53,800.00	$ 4,300.00	$ -49,500.00
Financial Disadvantage for 49500 by dropping Racing Bikes
2. No
3.
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 934,000.00	$ 267,000.00	$ 409,000.00	$ 258,000.00
Variable Manufacturing And Selling Expenses	$ 466,000.00	$ 114,000.00	$ 200,000.00	$ 152,000.00
Contribution Margin (Loss) (a)	$ 468,000.00	$ 153,000.00	$ 209,000.00	$ 106,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,300.00	$ 8,400.00	$ 40,200.00	$ 20,700.00
Depreciation On Special Equipment	$ 43,700.00	$ 20,700.00	$ 7,600.00	$ 15,400.00
Salaries Of Product Manager	$ 114,400.00	$ 40,200.00	$ 38,400.00	$ 35,800.00
Total Traceable Fixed Expenses (b)	$ 227,400.00	$ 69,300.00	$ 86,200.00	$ 71,900.00
Product Line Segment Margin (a-)	$ 240,600.00	$ 83,700.00	$ 122,800.00	$ 34,100.00
Common Fixed Expenses	$ 186,800.00
Net Operating Income (Loss)	$ 53,800.00
3. Yes , Segmental income is more Useful.

Hope this helped ! Let me know in case of any queries.