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 $ 269,000 $ 402,000 $ 257,000 Variable manufacturing and selling expenses 477,000 117,000 209,000 151,000 Contribution margin 451,000 152,000 193,000 106,000 Fixed expenses: Advertising, traceable 69,100 8,800 40,200 20,100 Depreciation of special equipment 44,100 20,800 7,500 15,800 Salaries of product-line managers 114,600 40,900 38,200 35,500 Allocated common fixed expenses* 185,600 53,800 80,400 51,400 Total fixed expenses 413,400 124,300 166,300 122,800 Net operating income (loss) $ 37,600 $ 27,700 $ 26,700 $ (16,800) *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

Solution 1:

Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Financial advantage (disadvantage) of discontinuing racing bikes
Sales	$928,000.00	$671,000.00	-$257,000.00
Variable manufacturing and selling expenses	$477,000.00	$326,000.00	-$151,000.00
Contribution margin	$451,000.00	$345,000.00	-$106,000.00
Fixed expenses:
Advertising traceable	$69,100.00	$49,000.00	-$20,100.00
Depreciation of special equipment	$44,100.00	$44,100.00	$0.00
Salaries of product manager	$114,600.00	$79,100.00	-$35,500.00
Common allocated costs	$185,600.00	$185,600.00	$0.00
Total fixed expenses	$413,400.00	$357,800.00	-$55,600.00
Net Operating income (loss)	$37,600.00	-$12,800.00	-$50,400.00

Solution 2:

As there is net financial disadvantage, therefore production and sale of racing bike should not be discontinued.

solution 3:

Segmanted Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$928,000.00	$269,000.00	$402,000.00	$257,000.00
Variable manufacturing and selling expenses	$477,000.00	$117,000.00	$209,000.00	$151,000.00
Contribution margin	$451,000.00	$152,000.00	$193,000.00	$106,000.00
Fixed expenses:
Advertising traceable	$69,100.00	$8,800.00	$40,200.00	$20,100.00
Depreciation of special equipment	$44,100.00	$20,800.00	$7,500.00	$15,800.00
Salaries of product manager	$114,600.00	$40,900.00	$38,200.00	$35,500.00
Total traceable fixed expenses	$227,800.00	$70,500.00	$85,900.00	$71,400.00
Segmant income	$223,200.00	$81,500.00	$107,100.00	$34,600.00
Common fixed expenses	$185,600.00
Net Operating income (Loss)	$37,600.00