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 $ 921,000 $ 261,000 $ 403,000 $ 257,000
Variable manufacturing and selling expenses 467,000 119,000 196,000 152,000
Contribution margin 454,000 142,000 207,000 105,000
Fixed expenses:
Advertising, traceable 69,300 8,700 40,300 20,300
Depreciation of special equipment 43,100 20,300 7,500 15,300
Salaries of product-line managers 114,700 40,300 38,400 36,000
Allocated common fixed expenses* 184,200 52,200 80,600 51,400
Total fixed expenses 411,300 121,500 166,800 123,000
Net operating income (loss) $ 42,700 $ 20,500 $ 40,200 $ (18,000)

*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.* 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
Sales	921000	664000	-257000
Variable manufacturing and selling expenses	467000	315000	152000
Contribution margin (loss)	454000	349000	-105000
Fixed expenses:
Advertising, traceable	69300	49000	20300
Depreciation on special equipment	43100	43100	0
Salaries of product manager	114700	78700	36000
Common allocated costs	184200	184200	0
Total fixed expenses	411300	355000	56300
Net operating income (loss)	42700	-6000	-48700
Financial (disadvantage) $(48700)
2
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	261000	403000	257000
Variable manufacturing and selling expenses	467000	119000	196000	152000
Contribution margin (loss)	454000	142000	207000	105000
Traceable fixed expenses:
Advertising, traceable	69300	8700	40300	20300
Depreciation on special equipment	43100	20300	7500	15300
Salaries of product manager	114700	40300	38400	36000
Total traceable fixed expenses	227100	69300	86200	71600
Product line segment margin	226900	72700	120800	33400
Common fixed expenses	184200
Net operating income (loss)	42700