Question

he 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 $ 932,000 $ 269,000 $ 406,000 $ 257,000 Variable manufacturing and selling expenses 473,000 114,000 199,000 160,000 Contribution margin 459,000 155,000 207,000 97,000 Fixed expenses: Advertising, traceable 69,800 8,400 40,700 20,700 Depreciation of special equipment 43,700 20,400 8,000 15,300 Salaries of product-line managers 114,700 40,600 38,500 35,600 Allocated common fixed expenses* 186,400 53,800 81,200 51,400 Total fixed expenses 414,600 123,200 168,400 123,000 Net operating income (loss) $ 44,400 $ 31,800 $ 38,600 $ (26,000) *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

Ans:

Part-1 Computa of Total Financial Advantage / Disadvantge by Droppng Racing Bikes
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperating Income
Sales	$ 932,000.00	$ 675,000.00	$ -257,000.00
Variable Manufacturing And Selling Expenses	$ 473,000.00	$ 313,000.00	$ -160,000.00
Contribution Margin (Loss) (a)	$ 459,000.00	$ 362,000.00	$ -97,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,800.00	$ 49,100.00	$ -20,700.00
Depreciation On Special Equipment	$ 43,700.00	$ 28,400.00	$ -15,300.00
Salaries Of Product Manager	$ 114,700.00	$ 79,100.00	$ -35,600.00
Common Allocated Costs	$ 186,400.00	$ 135,000.00	$ -51,400.00
Total Fixed Expenses (b)	$ 414,600.00	$ 291,600.00	$ -123,000.00
Net Operating Income (Loss) (a-b)	$ 44,400.00	$ 70,400.00	$ 26,000.00
Financial advantage of $26000 by dropping Racing Bikes
Part-2 Yes, racing bikes should be discontinued
Part-3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 932,000.00	$ 269,000.00	$ 406,000.00	$ 257,000.00
Variable Manufacturing And Selling Expenses	$ 473,000.00	$ 114,000.00	$ 199,000.00	$ 160,000.00
Contribution Margin (Loss) (a)	$ 459,000.00	$ 155,000.00	$ 207,000.00	$ 97,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,800.00	$ 8,400.00	$ 40,700.00	$ 20,700.00
Depreciation On Special Equipment	$ 43,700.00	$ 20,400.00	$ 8,000.00	$ 15,300.00
Salaries Of Product Manager	$ 114,700.00	$ 40,600.00	$ 38,500.00	$ 35,600.00
Total Traceable Fixed Expenses (b)	$ 228,200.00	$ 69,400.00	$ 87,200.00	$ 71,600.00
Product Line Segment Margin (a-)	$ 230,800.00	$ 85,600.00	$ 119,800.00	$ 25,400.00
Common Fixed Expenses	$ 186,400.00
Net Operating Income (Loss)	$ 44,400.00