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		$	264,000		$	407,000		$	253,000
Variable manufacturing and selling expenses		459,000			113,000			196,000			150,000
Contribution margin		465,000			151,000			211,000			103,000
Fixed expenses:
Advertising, traceable		69,400			8,200			40,600			20,600
Depreciation of special equipment		43,400			20,400			7,600			15,400
Salaries of product-line managers		116,200			40,900			38,500			36,800
Allocated common fixed expenses*		184,800			52,800			81,400			50,600
Total fixed expenses		413,800			122,300			168,100			123,400
Net operating income (loss)	$	51,200		$	28,700		$	42,900		$	(20,400)

*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

Part-1
	Total	Discontinue	Net Increase/(Decrease)
	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue	$924,000	$671,000	-$253,000
Less: Variable cost	$459,000	$309,000	-$150,000
Contribution margin	$465,000	$362,000	-$103,000
Less: Fixed cost		$0
Advertisement	$69,400	$48,800	-$20,600
Depreciation	$43,400	$43,400	$0
Salary of product line manager	$116,200	$79,400	-$36,800
Common Fixed cost	$184,800	$184,800	$0
SEGMENT MARGIN	$51,200	$671,000	-$30,200
Hence Financial Disadvantage of $30200 per quarter , in case of discontinuing th Racing Bikes

Part-2 No, Racing Rike Division Shall not be Discontinued

Part-3 SEGMENT-WISE INCOME STATEMENT
	Total	Dirt	Mountain	Racing
	AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue	$924,000	$264,000	$407,000	$253,000
Less: Variable cost	$459,000	$113,000	$196,000	$150,000
Contribution margin	$465,000	$151,000	$211,000	$103,000
Less: Traceable Expense
Advertisement	$69,400	$8,200	$40,600	$20,600
Depreciation	$43,400	$20,400	$7,600	$15,400
Salary of product line manager	$116,200	$40,900	$38,500	$36,800
tal Traecable expense	$229,000	$69,500	$86,700	$72,800
SEGMENT MARGIN	$236,000	$81,500	$124,300	$30,200
Less: Common Fixed expesne	$184,800
Net Operating Income	$51,200