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 $ 923,000 $ 265,000 $ 400,000 $ 258,000 Variable manufacturing and selling expenses 464,000 116,000 197,000 151,000 Contribution margin 459,000 149,000 203,000 107,000 Fixed expenses: Advertising, traceable 70,000 8,900 40,200 20,900 Depreciation of special equipment 44,400 21,000 7,900 15,500 Salaries of product-line managers 115,800 40,800 38,600 36,400 Allocated common fixed expenses* 184,600 53,000 80,000 51,600 Total fixed expenses 414,800 123,700 166,700 124,400 Net operating income (loss) $ 44,200 $ 25,300 $ 36,300 $ (17,400) *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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	923000	665000	-258000
Variable manufacturing and selling expenses	464000	313000	151000
Contribution margin (loss)	459000	352000	-107000
Fixed expenses:
Advertising, traceable	70000	49100	20900
Depreciation on special equipment	44400	44400	0
Salaries of product manager	115800	79400	36400
Common allocated costs	184600	184600	0
Total fixed expenses	414800	357500	57300
Net operating income (loss)	44200	-5500	-49700
Financial (disadvantage) ($49700)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	923000	265000	400000	258000
Variable manufacturing and selling expenses	464000	116000	197000	151000
Contribution margin (loss)	459000	149000	203000	107000
Traceable fixed expenses:
Advertising, traceable	70000	8900	40200	20900
Depreciation on special equipment	44400	21000	7900	15500
Salaries of product manager	115800	40800	38600	36400
Total traceable fixed expenses	230200	70700	86700	72800
Product line segment margin	228800	78300	116300	34200
Common fixed expenses	184600
Net operating income (loss)	44200