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		$	262,000		$	407,000		$	254,000
Variable manufacturing and selling expenses		467,000			111,000			205,000			151,000
Contribution margin		456,000			151,000			202,000			103,000
Fixed expenses:
Advertising, traceable		69,500			8,200			40,500			20,800
Depreciation of special equipment		44,100			20,400			8,000			15,700
Salaries of product-line managers		115,200			40,100			38,400			36,700
Allocated common fixed expenses*		184,600			52,400			81,400			50,800
Total fixed expenses		413,400			121,100			168,300			124,000
Net operating income (loss)	$	42,600		$	29,900		$	33,700		$	(21,000)

*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	$ 923,000.00	$ 254,000.00	$ -669,000.00
Variable Manufacturing And Selling Expenses	$ 467,000.00	$ 151,000.00	$ -316,000.00
Contribution Margin (Loss) (a)	$ 456,000.00	$ 103,000.00	$ -353,000.00
Fixed Expenses:
Advertising, Traceable	$ 69,500.00	$ 20,800.00	$ -48,700.00
Depreciation On Special Equipment	$ 44,100.00	$ 15,700.00	$ -28,400.00
Salaries Of Product Manager	$ 115,200.00	$ 36,700.00	$ -78,500.00
Common Allocated Costs	$ 184,600.00	$ 184,600.00	$ 0.00
Total Fixed Expenses (b)	$ 413,400.00	$ 257,800.00	$ -155,600.00
Net Operating Income (Loss) (a-b)	$ 42,600.00	$ -154,800.00	$ -197,400.00
Financial Disadvantage fo $197400 by dropping Racing Bikes

Part-2 No, racing bikes should not be discontinued

Part-3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$ 923,000.00	$ 262,000.00	$ 407,000.00	$ 254,000.00
Variable Manufacturing And Selling Expenses	$ 467,000.00	$ 111,000.00	$ 205,000.00	$ 151,000.00
Contribution Margin (Loss) (a)	$ 456,000.00	$ 151,000.00	$ 202,000.00	$ 103,000.00
Traceable Fixed Expenses:
Advertising, Traceable	$ 69,500.00	$ 8,200.00	$ 40,500.00	$ 20,800.00
Depreciation On Special Equipment	$ 44,100.00	$ 20,400.00	$ 8,000.00	$ 15,700.00
Salaries Of Product Manager	$ 115,200.00	$ 40,100.00	$ 38,400.00	$ 36,700.00
Total Traceable Fixed Expenses (b)	$ 228,800.00	$ 68,700.00	$ 86,900.00	$ 73,200.00
Product Line Segment Margin (a-)	$ 227,200.00	$ 82,300.00	$ 115,100.00	$ 29,800.00
Common Fixed Expenses	$ 184,600.00
Net Operating Income (Loss)	$ 42,600.00