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 $ 928,000 $ 270,000 $ 404,000 $ 254,000 Variable manufacturing and selling expenses 469,000 116,000 195,000 158,000 Contribution margin 459,000 154,000 209,000 96,000 Fixed expenses: Advertising, traceable 68,900 8,100 40,600 20,200 Depreciation of special equipment 43,600 20,200 7,700 15,700 Salaries of product-line managers 114,200 40,300 38,700 35,200 Allocated common fixed expenses* 185,600 54,000 80,800 50,800 Total fixed expenses 412,300 122,600 167,800 121,900 Net operating income (loss) $ 46,700 $ 31,400 $ 41,200 $ (25,900) *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

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				928,000	674000	-254,000
	Variable expenses				469,000	311000	158,000
	contribution margin (loss)				459,000	363000	-96,000
	fixed expenses
	Advertising,traceable				68,900	48700	20,200
	Depreciation on special equipment				43,600	43,600	0
	Salaries of product managers				114,200	79000	35,200
	common allocated costs				185,600	185,600	0
	total fixed expenses				412,300	356900	55,400
	Net operating income(loss)				46,700	6100	-40,600
	Net financial disadvantage			$40,600
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				928,000	270,000	404,000	254,000
	variable manufacturing and selling expense				469,000	116,000	195,000	158,000
	contribution margin (loss)				459,000	154,000	209,000	96,000
	traceable fixed expenses
	advertising				68,900	8,100	40,600	20,200
	depreciation on special equipment				43,600	20,200	7,700	15,700
	salaries of the product line managers				114,200	40,300	38,700	35,200
	total traceable fixed expenses				226,700	68,600	87,000	71,100
	product line segment margin				232,300	85,400	122,000	24,900
	common fixed expenses				185,600
	net operating income(loss)				46,700