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	$	928,000		$	266,000		$	404,000		$	258,000
Variable manufacturing and selling expenses		461,000			116,000			192,000			153,000
Contribution margin		467,000			150,000			212,000			105,000
Fixed expenses:
Advertising, traceable		69,800			8,300			41,000			20,500
Depreciation of special equipment		43,700			20,700			7,300			15,700
Salaries of product-line managers		115,800			40,800			38,700			36,300
Allocated common fixed expenses*		185,600			53,200			80,800			51,600
Total fixed expenses		414,900			123,000			167,800			124,100
Net operating income (loss)	$	52,100		$	27,000		$	44,200		$	(19,100)

*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				928,000	670000	-258,000
	Variable expenses				461,000	308000	153,000
	contribution margin (loss)				467,000	362000	-105,000
	fixed expenses
	Advertising,traceable				69,800	49300	20,500
	Depreciation on special equipment				43,700	43,700	0
	Salaries of product managers				115,800	79500	36,300
	common allocated costs				185,600	185,600	0
	total fixed expenses				414,900	358100	56,800
	Net operating income(loss)				52,100	3900	-48,200
	Net financial disadvantage			($48,200)
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				928,000	266,000	404,000	258,000
	variable manufacturing and selling expense				461,000	116,000	192,000	153,000
	contribution margin (loss)				467,000	150,000	212,000	105,000
	traceable fixed expenses
	advertising				69,800	8,300	41,000	20,500
	depreciation on special equipment				43,700	20,700	7,300	15,700
	salaries of the product line managers				115,800	40,800	38,700	36,300
	total traceable fixed expenses				229,300	69,800	87,000	72,500
	product line segment margin				237,700	80,200	125,000	32,500
	common fixed expenses				185,600
	net operating income(loss)				52,100
2b)	yes