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 $ 925,000 $ 265,000 $ 409,000 $ 251,000 Variable manufacturing and selling expenses 469,000 120,000 198,000 151,000 Contribution margin 456,000 145,000 211,000 100,000 Fixed expenses: Advertising, traceable 69,600 8,800 40,100 20,700 Depreciation of special equipment 43,600 20,700 7,400 15,500 Salaries of product-line managers 114,100 40,000 38,900 35,200 Allocated common fixed expenses* 185,000 53,000 81,800 50,200 Total fixed expenses 412,300 122,500 168,200 121,600 Net operating income (loss) $ 43,700 $ 22,500 $ 42,800 $ (21,600) *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

Solution 1:
Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Financial advantage (disadvantage) of discontinuing racing bikes
Sales	$925,000.00	$674,000.00	-$251,000.00
Variable manufacturing and selling expenses	$469,000.00	$318,000.00	-$151,000.00
Contribution margin	$456,000.00	$356,000.00	-$100,000.00
Fixed expenses:
Advertising traceable	$69,600.00	$48,900.00	-$20,700.00
Depreciation of special equipment	$43,600.00	$43,600.00	$0.00
Salaries of product manager	$114,100.00	$78,900.00	-$35,200.00
Common allocated costs	$185,000.00	$185,000.00	$0.00
Total fixed expenses	$412,300.00	$356,400.00	-$55,900.00
Net Operating income (loss)	$43,700.00	-$400.00	-$44,100.00

Solution 2:

As there is net financial disadvantage, therefore production and sale of racing bike should not be discontinued.

Solution 3:
Segmanted Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$925,000.00	$265,000.00	$409,000.00	$251,000.00
Variable manufacturing and selling expenses	$469,000.00	$120,000.00	$198,000.00	$151,000.00
Contribution margin	$456,000.00	$145,000.00	$211,000.00	$100,000.00
Fixed expenses:
Advertising traceable	$69,600.00	$8,800.00	$40,100.00	$20,700.00
Depreciation of special equipment	$43,600.00	$20,700.00	$7,400.00	$15,500.00
Salaries of product manager	$114,100.00	$40,000.00	$38,900.00	$35,200.00
Total traceable fixed expenses	$227,300.00	$69,500.00	$86,400.00	$71,400.00
Segmant income	$228,700.00	$75,500.00	$124,600.00	$28,600.00
Common fixed expenses	$185,000.00
Net Operating income (Loss)	$43,700.00