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 $ 270,000 $ 401,000 $ 253,000 Variable manufacturing and selling expenses 475,000 113,000 202,000 160,000 Contribution margin 449,000 157,000 199,000 93,000 Fixed expenses: Advertising, traceable 69,600 8,300 40,800 20,500 Depreciation of special equipment 44,000 21,000 7,900 15,100 Salaries of product-line managers 114,500 40,100 38,100 36,300 Allocated common fixed expenses* 184,800 54,000 80,200 50,600 Total fixed expenses 412,900 123,400 167,000 122,500 Net operating income (loss) $ 36,100 $ 33,600 $ 32,000 $ (29,500) *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: 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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	924000	671000	-253000
Variable manufacturing and selling expenses	475000	315000	160000
Contribution margin (loss)	449000	356000	-93000
Fixed expenses:
Advertising, traceable	69600	49100	20500
Depreciation on special equipment	44000	44000	0
Salaries of product manager	114500	78200	36300
Common allocated costs	184800	184800	0
Total fixed expenses	412900	356100	56800
Net operating income (loss)	36100	-100	-36200
Financial (disadvantage) $(36200)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	270000	401000	253000
Variable manufacturing and selling expenses	475000	113000	202000	160000
Contribution margin (loss)	449000	157000	199000	93000
Traceable fixed expenses:
Advertising, traceable	69600	8300	40800	20500
Depreciation on special equipment	44000	21000	7900	15100
Salaries of product manager	114500	40100	38100	36300
Total traceable fixed expenses	228100	69400	86800	71900
Product line segment margin	220900	87600	112200	21100
Common fixed expenses	184800
Net operating income (loss)	36100