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	$	923,000		$	266,000		$	405,000		$	252,000
Variable manufacturing and selling expenses		476,000			118,000			203,000			155,000
Contribution margin		447,000			148,000			202,000			97,000
Fixed expenses:
Advertising, traceable		69,800			8,600			41,000			20,200
Depreciation of special equipment		43,800			20,600			7,300			15,900
Salaries of product-line managers		115,900			40,100			38,800			37,000
Allocated common fixed expenses*		184,600			53,200			81,000			50,400
Total fixed expenses		414,100			122,500			168,100			123,500
Net operating income (loss)	$	32,900		$	25,500		$	33,900		$	(26,500)

*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

Req 1
Net Financial Advantage/(disadvantage) from Discontinuance of Racing Bikes:
Loss of revenue					-252000
Saving in Relevant cost:
Variable cost					155000
Adverstisement cost					20200
Salaries of Product line manager					37000
Net financial disadvantage					-39800
Req 2:
No, Segment off Racing Bikes shall not be continued.
Req 3.
SEGMENT-WISE INCOME STATEMENT
				TOTAL	DIRT BIKES	MOUNTAIN	RACING
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				923,000	266,000	405,000	252,000
Less: Variable cost				476,000	118,000	203,000	155,000
Contribution margin				447,000	148,000	202,000	97,000
Fixed expense:
Advertising				69,800	8,600	41,000	20,200
Depreciation				43,800	20,600	7,300	15,900
salaries of Product line managers				115,900	40,100	38,800	37,000
SEGMENT MARGIN				217,500	78,700	114,900	23,900
Less: Common fixed expense				184,600
Net Operating Income				32,900