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	$	922,000		$	264,000		$	405,000		$	253,000
Variable manufacturing and selling expenses		473,000			119,000			199,000			155,000
Contribution margin		449,000			145,000			206,000			98,000
Fixed expenses:
Advertising, traceable		69,300			8,100			40,800			20,400
Depreciation of special equipment		43,600			20,200			7,800			15,600
Salaries of product-line managers		114,200			40,300			38,100			35,800
Allocated common fixed expenses*		184,400			52,800			81,000			50,600
Total fixed expenses		411,500			121,400			167,700			122,400
Net operating income (loss)	$	37,500		$	23,600		$	38,300		$	(24,400)

*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.

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.

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Totals Dirt Bikes Mountain Bikes Racing Bikes Sales $1,094 $390,000 Contribution margin (loss) 1,094 390,000 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 1,094 $390,000 $0 $0 Net operating income (loss) $1,094

Answer 1

1.

	Total if racing bikes are continued	Total if racing bikes are discontinued	Effect on net income
Sales	$922,000	$669,000	-$253,000
Variable manufacturing and selling expenses	473,000	318,000	155,000
Contribution margin	449,000	351,000	-98,000
Fixed expenses:
Advertising, traceable	69,300	48,900	20,400
Depreciation of special equipment	43,600	43,600	0
Salaries of product line managers	114,200	78,400	35,800
Allocated common fixed expenses	184,400	184,400	0
Total fixed expenses	411,500	355,300	56,200
Net operating income (loss)	$37,500	-$4,300	-$41,800

The financial disadvantage to discontinue racing bikes is $41,800.

2.

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

3.

	Total	Dirt bikes	Mountain bikes	Racing bikes
Sales	$922,000	$264,000	$405,000	$253,000
Variable manufacturing and selling expenses	473,000	119,000	199,000	155,000
Contribution margin	449,000	145,000	206,000	98,000
Traceable fixed expenses:
Advertising	69,300	8,100	40,800	20,400
Depreciation of special equipment	43,600	20,200	7,800	15,600
Salaries of product line managers	114,200	40,300	38,100	35,800
Total traceable fixed expenses	227,100	68,600	86,700	71,800
Product line segment margin (loss)	221,900	76,400	119,300	26,200
Common fixed expenses	184,400
Net operating income (loss)	$37,500