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	$	929,000		$	267,000		$	406,000		$	256,000
Variable manufacturing and selling expenses		465,000			110,000			205,000			150,000
Contribution margin		464,000			157,000			201,000			106,000
Fixed expenses:
Advertising, traceable		69,900			8,600			40,900			20,400
Depreciation of special equipment		43,000			20,100			7,100			15,800
Salaries of product-line managers		116,500			41,000			39,000			36,500
Allocated common fixed expenses*		185,800			53,400			81,200			51,200
Total fixed expenses		415,200			123,100			168,200			123,900
Net operating income (loss)	$	48,800		$	33,900		$	32,800		$	(17,900)

*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.

Incremental Analysis - Regal Cycle - Racing Bikes
Particulars	Continue Racing Bikes (Alt 1)	Discontinue Racing Bikes (Alt2)	Financial advantage (disadvantage) of discontinuing
Sales	$2,56,000	$0	-$2,56,000
Variable manufacturing and selling expenses	$1,50,000	$0	-$1,50,000
Contribution Margin	$1,06,000	$0	-$1,06,000
Fixed Expenses:
Advertising Traceable	$20,400	$0	-$20,400
Salaries of Product line manager	$36,500	$0	-$36,500
Net Income	$49,100	$0	-$49,100

Disadvantage = - $49,100

2.

No, The production and sale of racing bikes should not be discontinued.

3.

Regal Cycle Company
Segmanted Income Statement
Particulars	Total	Dirt bikes	Mountain bikes	Racing Bikes
Sales	$9,29,000	$2,67,000	$4,06,000	$2,56,000
Variable Expenses	$4,65,000	$1,10,000	$2,05,000	$1,50,000
Contribution margin	$4,64,000	$1,57,000	$2,01,000	$1,06,000
Less: Traceable Fixed Costs:
Advertising	$69,900	$8,600	$40,900	$20,400
Depreciation	$43,000	$20,100	$7,100	$15,800
Salaries of Product line managers	$1,16,500	$41,000	$39,000	$36,500
Total traceable fixed expense	$2,29,400	$69,700	$87,000	$72,700
product line Segment Margin	$2,34,600	$87,300	$1,14,000	$33,300
Less: Common fixed expenses	$1,85,800
Net Operating Profit	$48,800