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	$	920,000		$	266,000		$	404,000		$	250,000
Variable manufacturing and selling expenses		469,000			116,000			202,000			151,000
Contribution margin		451,000			150,000			202,000			99,000
Fixed expenses:
Advertising, traceable		69,600			8,600			40,500			20,500
Depreciation of special equipment		43,300			20,800			7,200			15,300
Salaries of product-line managers		115,400			41,000			39,000			35,400
Allocated common fixed expenses*		184,000			53,200			80,800			50,000
Total fixed expenses		412,300			123,600			167,500			121,200
Net operating income (loss)	$	38,700		$	26,400		$	34,500		$	(22,200)

*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?

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 increase or (decrease)
	Sales	$       9,20,000	$       6,70,000	$     -2,50,000
	Variable manufacturing and selling expenses	$       4,69,000	$       3,18,000	$       1,51,000
	Contribution margin (loss)	$       4,51,000	$       3,52,000	$         -99,000
	Fixed expenses:
	Advertising, traceable	$           69,600	$           49,100	$           20,500
	Depreciation on special equipment	$           43,300	$           43,300	$                    -
	Salaries of product managers	$       1,15,400	$           80,000	$           35,400
	Allocated common expense	$       1,84,000	$       1,84,000	$                    -
	Total fixed expenses	$       4,12,300	$       3,56,400	$           55,900
	Net operating income (loss)	$           38,700	$           -4,400	$         -43,100
	Financial disadvantage = $43,100
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,20,000	$       2,66,000	$       4,04,000	$             2,50,000
	Variable manufacturing and selling expenses	$       4,69,000	$       1,16,000	$       2,02,000	$             1,51,000
	Contribution margin (loss)	$       4,51,000	$       1,50,000	$       2,02,000	$                99,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,600	$             8,600	$           40,500	$                20,500
	Depreciation on special equipment	$           43,300	$           20,800	$             7,200	$                15,300
	Salaries of product managers	$       1,15,400	$           41,000	$           39,000	$                35,400
	Total traceable fixed expenses	$       2,28,300	$           70,400	$           86,700	$                71,200
	Product line segment margin (loss)	$       2,22,700	$           79,600	$       1,15,300	$                27,800
	Allocated common fixed expense	$       1,84,000
	Net operating income (loss)	$           38,700

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