Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2] 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 $ 918,000 $ 262,000 $ 406,000 $ 250,000 Variable manufacturing and selling expenses 461,000 114,000 192,000 155,000 Contribution margin 457,000 148,000 214,000 95,000 Fixed expenses: Advertising, traceable 69,200 8,400 40,700 20,100 Depreciation of special equipment 43,700 20,800 7,500 15,400 Salaries of product-line managers 115,800 40,100 38,900 36,800 Allocated common fixed expenses* 183,600 52,400 81,200 50,000 Total fixed expenses 412,300 121,700 168,300 122,300 Net operating income (loss) $ 44,700 $ 26,300 $ 45,700 $ (27,300) *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: NetOperatingIncome
Sales	918000	668000	-250000
Variable manufacturing and selling expenses	461000	306000	155000
Contribution margin (loss)	457000	362000	-95000
Fixed expenses:
Advertising, traceable	69200	49100	20100
Depreciation on special equipment	43700	43700	0
Salaries of product manager	115800	79000	36800
Common allocated costs	183600	183600	0
Total fixed expenses	412300	355400	56900
Net operating income (loss)	44700	6600	-38100
Fiinancial disadvantage per quarter = $38100
2
No,production and sale of racing bikes shuould not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	918000	262000	406000	250000
Variable manufacturing and selling expenses	461000	114000	192000	155000
Contribution margin (loss)	457000	148000	214000	95000
Traceable fixed expenses:
Advertising, traceable	69200	8400	40700	20100
Depreciation on special equipment	43700	20800	7500	15400
Salaries of product manager	115800	40100	38900	36800
Total traceable fixed expenses	228700	69300	87100	72300
Product line segment margin	228300	78700	126900	22700
Common fixed expenses	183600
Net operating income (loss)	44700