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	$	924,000		$	270,000		$	402,000		$	252,000
Variable manufacturing and selling expenses		456,000			114,000			190,000			152,000
Contribution margin		468,000			156,000			212,000			100,000
Fixed expenses:
Advertising, traceable		69,700			8,200			40,800			20,700
Depreciation of special equipment		43,100			20,200			7,500			15,400
Salaries of product-line managers		115,500			41,000			38,800			35,700
Allocated common fixed expenses*		184,800			54,000			80,400			50,400
Total fixed expenses		413,100			123,400			167,500			122,200
Net operating income (loss)	$	54,900		$	32,600		$	44,500		$	(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?

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.

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

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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.

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	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Answer 1

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				924,000	672,000	-252,000
Less: Variable cost				456,000	304,000	152,000
Contribution margin				468,000	368,000	-100,000
Less: Fixed cost
Advertisement				69,700	49,000	20,700
Depreciation				43,100	43,100	0
Salary of product line manager				115,500	79,800	35,700
Common Fixed cost				184,800	184,800	0
SEGMENT MARGIN				54,900	11,300	-43,600
No, Racing Rike Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt	Mountain	Racing
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				924,000	270,000	402,000	252,000
Less: Variable cost				456,000	114,000	190,000	152,000
Contribution margin				468,000	156,000	212,000	100,000
Less: Traceable Expense
Advertisement				69,700	8,200	40,800	20,700
Depreciation				43,100	20,200	7,500	15,400
Salary of product line manager				115,500	41,000	38,800	35,700
Total Traecable expense				228,300	69,400	87,100	71,800
SEGMENT MARGIN				239,700	86,600	124,900	28,200
Less: Common Fixed expesne				184,800
Net Operating Income				54,900