Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2]

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		$	402,000		$	253,000
Variable manufacturing and selling expenses		478,000			117,000			207,000			154,000
Contribution margin		446,000			152,000			195,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,500			40,800			20,800
Depreciation of special equipment		42,700			20,100			7,300			15,300
Salaries of product-line managers		114,900			40,600			38,200			36,100
Allocated common fixed expenses*		184,800			53,800			80,400			50,600
Total fixed expenses		412,500			123,000			166,700			122,800
Net operating income (loss)	$	33,500		$	29,000		$	28,300		$	(23,800)

*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.

1.What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Financial (advantage/disadvantage)=

2. Should the production and sale of racing bikes be discontinued?

yes/no

3.

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
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	924000	671000	-253000
Variable manufacturing and selling expenses	478000	324000	154000
Contribution margin (loss)	446000	347000	-99000
Fixed expenses:
Advertising, traceable	70100	49300	20800
Depreciation on special equipment	42700	42700	0
Salaries of product manager	114900	78800	36100
Common allocated costs	184800	184800	0
Total fixed expenses	412500	355600	56900
Net operating income (loss)	33500	-8600	-42100
Financial (disadvantage) (42100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	269000	402000	253000
Variable manufacturing and selling expenses	478000	117000	207000	154000
Contribution margin (loss)	446000	152000	195000	99000
Traceable fixed expenses:
Advertising, traceable	70100	8500	40800	20800
Depreciation on special equipment	42700	20100	7300	15300
Salaries of product manager	114900	40600	38200	36100
Total traceable fixed expenses	227700	69200	86300	72200
Product line segment margin	218300	82800	108700	26800
Common fixed expenses	184800
Net operating income (loss)	33500