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	$	926,000		$	266,000		$	403,000		$	257,000
Variable manufacturing and selling expenses		479,000			111,000			208,000			160,000
Contribution margin		447,000			155,000			195,000			97,000
Fixed expenses:
Advertising, traceable		69,200			8,200			40,700			20,300
Depreciation of special equipment		43,600			20,600			7,200			15,800
Salaries of product-line managers		115,000			40,200			38,900			35,900
Allocated common fixed expenses*		185,200			53,200			80,600			51,400
Total fixed expenses		413,000			122,200			167,400			123,400
Net operating income (loss)	$	34,000		$	32,800		$	27,600		$	(26,400)

*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

Req 1:
Financial Advantage/ (Disadvantage)
Loss of revenue				-257000
Less: savings in cost
Variable manufacturig and selling cost				160000
Advertisement expense				20300
Salaries of product line manager				35900
Financial disadvantage of discontinuance				-40800
Hence, Racing bike shall not be discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Dirt Bikes	Mountain	Racing bikes
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				926,000	266,000	403,000	257,000
Less: variable cost				479,000	111,000	208,000	160,000
Conribution margin				447,000	155,000	195,000	97,000
Less: Traceable fixed cost
Advertisement expense				69,200	8,200	40,700	20,300
Depreciation				43,600	20,600	7,200	15,800
Salaries of product line manager				115,000	40,200	38,900	35,900
SEGMENT MARGIN				219,200	86,000	108,200	25,000
Less: Common Fixed expense				185,200
Net Operating Income				34,000