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		$	268,000		$	405,000		$	256,000
Variable manufacturing and selling expenses		477,000			118,000			199,000			160,000
Contribution margin		452,000			150,000			206,000			96,000
Fixed expenses:
Advertising, traceable		69,200			9,000			40,100			20,100
Depreciation of special equipment		43,800			21,000			7,600			15,200
Salaries of product-line managers		116,100			40,800			38,800			36,500
Allocated common fixed expenses*		185,800			53,600			81,000			51,200
Total fixed expenses		414,900			124,400			167,500			123,000
Net operating income (loss)	$	37,100		$	25,600		$	38,500		$	(27,000)

*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. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes:-

	Current Total	Total if recing bikes are dropped	Difference: Net operation income increase or (Decrease)
Sales	929,000	673,000	(256,000)
Variable manufacturing and selling expenses	477,000	317,000	160,000
Contribution Margin (Loss)	452,000	356,000	(96,000)
Fixed expenses:
Advertising, traceable	69,200	49,100	20,100
Depreciation on special equipment	43,800	43,800	0
Salaries and product managers	116,100	79,600	36,500
Common allocated costs	185,800	185,800	0
Total fixed expenses	414,900	358,300	56,600
Net operatin income (loss)	37,100	(2,300)	(39,400)

2. Should the production and sale of racing bikes be discontinued:-

No, due to incremental loss of $39,400

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:-

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	929,000	268,000	405,000	256,000
Variable manufacturing and selling expenses	477,000	118,000	199,000	160,000
Contribution margin	452,000	150,000	206,000	96,000
Fixed expenses:
Advertising, traceable	69,200	9,000	40,100	20,100
Depreciation of special equipment	43,800	21,000	7,600	15,200
Salaries of product-line managers	116,100	40,800	38,800	36,500
Total traceable fixed cost	229,100	70,800	86,500	71,800
Product line segment margin	222,900	79,200	119,500	24,200
Common fixed expenses	185,800
Net operating income (loss)	37,100