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 $ 924,000 $ 269,000 $ 403,000 $ 252,000 Variable manufacturing and selling expenses 472,000 116,000 200,000 156,000 Contribution margin 452,000 153,000 203,000 96,000 Fixed expenses: Advertising, traceable 69,900 8,800 40,500 20,600 Depreciation of special equipment 44,500 20,900 8,000 15,600 Salaries of product-line managers 115,500 40,800 38,400 36,300 Allocated common fixed expenses* 184,800 53,800 80,600 50,400 Total fixed expenses 414,700 124,300 167,500 122,900 Net operating income (loss) $ 37,300 $ 28,700 $ 35,500 $ (26,900) *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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	924000	672000	-252000
Variable manufacturing and selling expenses	472000	316000	156000
Contribution margin (loss)	452000	356000	-96000
Fixed expenses:
Advertising, traceable	69900	49300	20600
Depreciation on special equipment	44500	44500	0
Salaries of product manager	115500	79200	36300
Common allocated costs	184800	184800	0
Total fixed expenses	414700	357800	56900
Net operating income (loss)	37300	-1800	-39100
Financial (disadvantage) per quarter (39100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	269000	403000	252000
Variable manufacturing and selling expenses	472000	116000	200000	156000
Contribution margin (loss)	452000	153000	203000	96000
Traceable fixed expenses:
Advertising, traceable	69900	8800	40500	20600
Depreciation on special equipment	44500	20900	8000	15600
Salaries of product manager	115500	40800	38400	36300
Total traceable fixed expenses	229900	70500	86900	72500
Product line segment margin	222100	82500	116100	23500
Common fixed expenses	184800
Net operating income (loss)	37300