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	$	928,000		$	267,000		$	403,000		$	258,000
Variable manufacturing and selling expenses		475,000			113,000			205,000			157,000
Contribution margin		453,000			154,000			198,000			101,000
Fixed expenses:
Advertising, traceable		70,000			8,700			40,600			20,700
Depreciation of special equipment		43,400			20,400			7,800			15,200
Salaries of product-line managers		115,100			40,100			38,700			36,300
Allocated common fixed expenses*		185,600			53,400			80,600			51,600
Total fixed expenses		414,100			122,600			167,700			123,800
Net operating income (loss)	$	38,900		$	31,400		$	30,300		$	(22,800)

*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.

What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

Financial disadvantage per quarter or financial advantage per quarter?

	$

Should the production and sale of racing bikes be discontinued? Yes or no

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.

	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.

Incremental Analysis - Regal Cycle - Racing Bikes
Particulars	Continue Racing Bikes (Alt 1)	Discontinue Racing Bikes (Alt2)	Financial advantage (disadvantage) of discontinuing
Sales	$2,58,000	$0	-$2,58,000
Variable manufacturing and selling expenses	$1,57,000	$0	-$1,57,000
Contribution Margin	$1,01,000	$0	-$1,01,000
Fixed Expenses:
Advertising Traceable	$20,700	$0	-$20,700
Salaries of Product line manager	$36,300	$0	-$36,300
Net Income	$44,000	$0	-$44,000

disadvantage = - $44,000

2.

No

3.

Regal Cycle Company
Segmanted Income Statement
Particulars	Total	Dirt bikes	Mountain bikes	Racing Bikes
Sales	$9,28,000	$2,67,000	$4,03,000	$2,58,000
Variable Expenses	$4,75,000	$1,13,000	$2,05,000	$1,57,000
Contribution margin	$4,53,000	$1,54,000	$1,98,000	$1,01,000
Less: Traceable Fixed Costs:
Advertising	$70,000	$8,700	$40,600	$20,700
Depreciation	$43,400	$20,400	$7,800	$15,200
Salaries of Product line managers	$1,15,100	$40,100	$38,700	$36,300
Total traceable fixed expense	$2,28,500	$69,200	$87,100	$72,200
product line Segment Margin	$2,24,500	$84,800	$1,10,900	$28,800
Less: Common fixed expenses	$1,85,600
Net Operating Profit	$38,900