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		$	403,000		$	257,000
Variable manufacturing and selling expenses		475,000			115,000			203,000			157,000
Contribution margin		449,000			149,000			200,000			100,000
Fixed expenses:
Advertising, traceable		69,900			8,900			40,600			20,400
Depreciation of special equipment		43,200			20,200			7,500			15,500
Salaries of product-line managers		114,500			40,400			38,700			35,400
Allocated common fixed expenses*		184,800			52,800			80,600			51,400
Total fixed expenses		412,400			122,300			167,400			122,700
Net operating income (loss)	$	36,600		$	26,700		$	32,600		$	(22,700)

*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

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				924,000	667000	-257,000
	Variable expenses				475,000	318000	157,000
	contribution margin (loss)				449,000	349000	-100,000
	fixed expenses
	Advertising,traceable				69,900	49500	20,400
	Depreciation on special equipment				43,200	43,200	0
	Salaries of product managers				114,500	79100	35,400
	common allocated costs				184,800	184,800	0
	total fixed expenses				412,400	356600	55,800
	Net operating income(loss)				36,600	-7600	-44,200
	Net financial disadvantage			($44,200)
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				924,000	264,000	403,000	257,000
	variable manufacturing and selling expense				475,000	115,000	203,000	157,000
	contribution margin (loss)				449,000	149,000	200,000	100,000
	traceable fixed expenses
	advertising				69,900	8,900	40,600	20,400
	depreciation on special equipment				43,200	20,200	7,500	15,500
	salaries of the product line managers				114,500	40,400	38,700	35,400
	total traceable fixed expenses				227,600	69,500	86,800	71,300
	product line segment margin				221,400	79,500	113,200	28,700
	common fixed expenses				184,800
	net operating income(loss)				36,600
2b)	yes