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	$	929,000		$	265,000		$	408,000		$	256,000
Variable manufacturing and selling expenses		465,000			117,000			196,000			152,000
Contribution margin		464,000			148,000			212,000			104,000
Fixed expenses:
Advertising, traceable		69,900			8,900			40,900			20,100
Depreciation of special equipment		43,100			20,100			7,200			15,800
Salaries of product-line managers		114,300			40,400			38,100			35,800
Allocated common fixed expenses*		185,800			53,000			81,600			51,200
Total fixed expenses		413,100			122,400			167,800			122,900
Net operating income (loss)	$	50,900		$	25,600		$	44,200		$	(18,900)

*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

1.

Incremental Analysis - Regal Cycle - Racing Bikes
Particulars	Continue Racing Bikes (Alt 1)	Discontinue Racing Bikes (Alt2)	Financial advantage (disadvantage) of discontinuing
Sales	$2,56,000	$0	-$2,56,000
Variable manufacturing and selling expenses	$1,52,000	$0	-$1,52,000
Contribution Margin	$1,04,000	$0	-$1,04,000
Fixed Expenses:
Advertising Traceable	$20,100	$0	-$20,100
Salaries of Product line manager	$35,800	$0	-$35,800
Net Income	$48,100	$0	-$48,100

2.

No.

3.

Regal Cycle Company
Segmanted Income Statement
Particulars	Total	Dirt bikes	Mountain bikes	Racing Bikes
Sales	$9,29,000	$2,65,000	$4,08,000	$2,56,000
Variable Expenses	$4,65,000	$1,17,000	$1,96,000	$1,52,000
Contribution margin	$4,64,000	$1,48,000	$2,12,000	$1,04,000
Less: Traceable Fixed Costs:
Advertising	$69,900	$8,900	$40,900	$20,100
Depreciation	$43,100	$20,100	$7,200	$15,800
Salaries of Product line managers	$1,14,300	$40,400	$38,100	$35,800
Total traceable fixed expense	$2,27,300	$69,400	$86,200	$71,700
product line Segment Margin	$2,36,700	$78,600	$1,25,800	$32,300
Less: Common fixed expenses	$1,85,800
Net Operating Profit	$50,900