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	$	262,000	$	405,000	$	259,000
Variable manufacturing and selling expenses		485,000		120,000		206,000		159,000
Contribution margin		441,000		142,000		199,000		100,000
Fixed expenses:
Advertising, traceable		68,900		8,300		40,200		20,400
Depreciation of special equipment		43,100		20,100		7,500		15,500
Salaries of product-line managers		114,200		40,100		38,300		35,800
Allocated common fixed expenses*		185,200		52,400		81,000		51,800
Total fixed expenses		411,400		120,900		167,000		123,500
Net operating income (loss)	$	29,600	$	21,100	$	32,000	$	(23,500)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

       

1b.	Should production and sale of the racing bikes be discontinued?
	Yes No

  

2a.	Prepare a segmented income statement.

       

2b.	Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

Answer 1

SOLUTION

1A.

	Current Total ($)	Total if racing bikes are dropped ($)	Difference: Net Operating Income Increase or (Decrease) ($)
Sales	926,000	667,000	(259,000)
Variable manufacturing and selling expenses	(485,000)	326,000	159,000
Contribution margin (loss)	441,000	341,000	(100,000)
Fixed expenses:
Advertising, traceable	68,900	48,500	20,400
Depreciation on special equipment	43,100	43,100	0
Salaries of product managers	114,200	78,400	35,800
Common allocated costs	185,200	185,200	0
Total fixed expenses	411,400	355,200	56,200
Net operating income (loss)	29,600	(14,200)	(43,800)

1B. No, production and sale of the racing bikes should not be discontinued.

2A.

	Current Total ($)	Dirt Bikes ($)	Mountain Bikes ($)	Racing bikes ($)
Sales	926,000	262,000	405,000	259,000
Variable manufacturing and selling expenses	(485,000)	120,000	206,000	159,000
Contribution margin (loss)	441,000	142,000	199,000	100,000
Fixed expenses:
Advertising, traceable	68,900	8,300	40,200	20,400
Depreciation on special equipment	43,100	20,100	7,500	15,500
Salaries of product managers	114,200	40,100	38,300	35,800
Total traceable fixed expenses	226,200	68,500	86,000	71,700
Product line segment margin	214,800	73,500	113,000	28,300
Common fixed expenses	185,200
Net operating income (loss)	29,600

2B. Yes, a segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.