Question

Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2]

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	$	926,000		$	265,000		$	405,000		$	256,000
Variable manufacturing and selling expenses		465,000			113,000			201,000			151,000
Contribution margin		461,000			152,000			204,000			105,000
Fixed expenses:
Advertising, traceable		70,200			8,600			40,800			20,800
Depreciation of special equipment		43,700			20,700			7,100			15,900
Salaries of product-line managers		114,000			40,600			38,100			35,300
Allocated common fixed expenses*		185,200			53,000			81,000			51,200
Total fixed expenses		413,100			122,900			167,000			123,200
Net operating income (loss)	$	47,900		$	29,100		$	37,000		$	(18,200)

*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.

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

	Financial (disadvantage) per quarter

?

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 Product line segment margin (loss) 0 $0 $0 $0 Net operating income (loss) $0

Answer 1