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	$	930,000		$	269,000		$	402,000		$	259,000
Variable manufacturing and selling expenses		467,000			117,000			192,000			158,000
Contribution margin		463,000			152,000			210,000			101,000
Fixed expenses:
Advertising, traceable		70,500			8,800			41,000			20,700
Depreciation of special equipment		42,500			20,200			7,100			15,200
Salaries of product-line managers		115,100			40,700			38,800			35,600
Allocated common fixed expenses*		186,000			53,800			80,400			51,800
Total fixed expenses		414,100			123,500			167,300			123,300
Net operating income (loss)	$	48,900		$	28,500		$	42,700		$	(22,300)

*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

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				930,000	671,000	-259,000
Less: Variable cost				467,000	309,000	158,000
Contribution margin				463,000	362,000	-101,000
Less: Fixed cost
Advertisement				70,500	49,800	20,700
Depreciation				42,500	42,500	0
Salary of product line manager				115,100	79,500	35,600
Common Fixed cost				186,000	186,000	0
SEGMENT MARGIN				48,900	4,200	-44,700
No, Racing Rike Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt	Mountain	Racing
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				930,000	269,000	402,000	259,000
Less: Variable cost				467,000	117,000	192,000	158,000
Contribution margin				463,000	152,000	210,000	101,000
Less: Traceable Expense
Advertisement				70,500	8,800	41,000	20,700
Depreciation				42,500	20,200	7,100	15,200
Salary of product line manager				115,100	40,700	38,800	35,600
Total Traecable expense				228,100	69,700	86,900	71,500
SEGMENT MARGIN				234,900	82,300	123,100	29,500
Less: Common Fixed expesne				186,000
Net Operating Income				48,900