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 $ 932,000 $ 270,000 $ 408,000 $ 254,000 Variable manufacturing and selling expenses 467,000 119,000 194,000 154,000 Contribution margin 465,000 151,000 214,000 100,000 Fixed expenses: Advertising, traceable 69,500 8,500 40,300 20,700 Depreciation of special equipment 43,600 20,300 7,500 15,800 Salaries of product-line managers 116,500 40,900 38,800 36,800 Allocated common fixed expenses* 186,400 54,000 81,600 50,800 Total fixed expenses 416,000 123,700 168,200 124,100 Net operating income (loss) $ 49,000 $ 27,300 $ 45,800 $ (24,100) *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

Financial advantage / (disadvantage) of discontinuing the racing bikes:

Loss of Contribution Margin	1,00,000
Savings:
Advertsing Expense	20,700
Salaries of Prodct Line Managers	36,800
Net Financial Disadvantage	(42,500)

Since there is net financial diadvantage of discontinuing production & sale of racing bikes, it is advisable to continue the Racing Bikes Division.

Segmented Income Statement:

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	9,32,000	2,70,000	4,08,000	2,54,000
Variable Mfg. & Selling Expense	4,67,000	1,19,000	1,94,000	1,54,000
Contribution Margin	4,65,000	1,51,000	2,14,000	1,00,000
Traceable Fixed Expenses:
Advertising	69,500	8,500	40,300	20,700
Depreciation of Special Equipment	43,600	20,300	7,500	15,800
Salary of Product Line Managers	1,16,500	40,900	38,800	36,800
Total Traceable Fixed Expenses	2,29,600	69,700	86,600	73,300
Prduct Line Segment Margin / (Loss)	2,35,400	81,300	1,27,400	26,700
Non Traceable Fixed Cost	1,86,400
Net Operating Income	49,000