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	$	919,000		$	263,000		$	405,000		$	251,000
Variable manufacturing and selling expenses		471,000			117,000			202,000			152,000
Contribution margin		448,000			146,000			203,000			99,000
Fixed expenses:
Advertising, traceable		70,000			8,400			40,800			20,800
Depreciation of special equipment		43,400			20,100			7,800			15,500
Salaries of product-line managers		116,500			41,000			38,800			36,700
Allocated common fixed expenses*		183,800			52,600			81,000			50,200
Total fixed expenses		413,700			122,100			168,400			123,200
Net operating income (loss)	$	34,300		$	23,900		$	34,600		$	(24,200)

*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

Ans:

1.Computation of Total Financial Advantage / Disadvantage by Dropping Racing Bikes
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	$ 919,000.00	$ 668,000.00	$ -251,000.00
Variable Manufacturing And Selling Expenses	$ 471,000.00	$ 319,000.00	$ 152,000.00
Contribution Margin (Loss) (a)	$ 448,000.00	$ 349,000.00	$ -99,000.00
Fixed Expenses:
Advertising, Traceable	$ 70,000.00	$ 49,200.00	$ 20,800.00
Depreciation On Special Equipment	$ 43,400.00	$ 43,400.00	$ 0.00
Salaries Of Product Manager	$ 116,500.00	$ 79,800.00	$ 36,700.00
Common Allocated Costs	$ 183,800.00	$ 183,800.00	$ 0.00
Total Fixed Expenses (b)	$ 413,700.00	$ 356,200.00	$ 57,500.00
Net Operating Income (Loss) (a-b)	$ 34,300.00	$ -7,200.00	$ -41,500.00
Financial Disadvantage for 41500 by dropping Racing Bikes
2. No
3.
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 919,000.00	$ 263,000.00	$ 405,000.00	$ 251,000.00
Variable Manufacturing And Selling Expenses	$ 471,000.00	$ 117,000.00	$ 202,000.00	$ 152,000.00
Contribution Margin (Loss) (a)	$ 448,000.00	$ 146,000.00	$ 203,000.00	$ 99,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 70,000.00	$ 8,400.00	$ 40,800.00	$ 20,800.00
Depreciation On Special Equipment	$ 43,400.00	$ 20,100.00	$ 7,800.00	$ 15,500.00
Salaries Of Product Manager	$ 116,500.00	$ 41,000.00	$ 38,800.00	$ 36,700.00
Total Traceable Fixed Expenses (b)	$ 229,900.00	$ 69,500.00	$ 87,400.00	$ 73,000.00
Product Line Segment Margin (a-)	$ 218,100.00	$ 76,500.00	$ 115,600.00	$ 26,000.00
Common Fixed Expenses	$ 183,800.00
Net Operating Income (Loss)	$ 34,300.00
3. Yes , Segmental income is more Useful.