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	$	924,000		$	268,000		$	401,000		$	255,000
Variable manufacturing and selling expenses		476,000			112,000			208,000			156,000
Contribution margin		448,000			156,000			193,000			99,000
Fixed expenses:
Advertising, traceable		69,300			8,100			40,600			20,600
Depreciation of special equipment		43,800			20,200			7,900			15,700
Salaries of product-line managers		114,500			40,800			38,400			35,300
Allocated common fixed expenses*		184,800			53,600			80,200			51,000
Total fixed expenses		412,400			122,700			167,100			122,600
Net operating income (loss)	$	35,600		$	33,300		$	25,900		$	(23,600)

*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?

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 Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 0 $0 $0 $0 Net operating income (loss) $0

Answer 1

Solution 1:

Particulars	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales	924,000	669,000	(255,000)
Variable manufacturing and selling expenses	476,000	320,000	156,000
Contribution margin (loss)	448,000	349,000	(99,000)
Fixed expenses:
Advertising, traceable	69,300	48,700	20,600
Depreciation on special equipment	43,800	43,800	0
Salaries of product managers	114,500	79,200	35,300
Common allocated costs	184,800	184,800	0
Total fixed expenses	412,400	356,500	55,900
Net operating income (loss)	35,600	(7,500)	(43,100)

The financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes by Regal Cycle Company is impact on net operating income (loss) is discontinuing operations is $ ($ 43,100).

Solution 2:

No. Because if production and sale of racing bikes be discontinued it would incur operating loss of ($ 43,100).

Solution 3:

Segmented income statement

Particulars	Total ($)	Dirt Bikes ($ )	Mountain Bikes ($)	Racing Bikes ($)
Sales	924,000	268,000	401,000	255,000
Variable manufacturing and selling expenses	476,000	112,000	208,000	156,000
Contribution margin (loss)	448,000	156,000	193,000	99,000
Traceable fixed expenses:
Advertising, traceable	69,300	8,100	40,600	20,600
Depreciation on special equipment	43,800	20,200	7,900	15,700
Salaries of product managers	114,500	40,800	38,400	35,300
Total traceable fixed expenses	227,600	69,100	86,900	71,600
Product line segment margin	220,400	86,900	106,100	27,400
Common fixed expenses	184,800
Net operating income (loss)	35,600