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	$	932,000		$	263,000		$	409,000		$	260,000
Variable manufacturing and selling expenses		469,000			112,000			202,000			155,000
Contribution margin		463,000			151,000			207,000			105,000
Fixed expenses:
Advertising, traceable		70,200			8,400			40,800			21,000
Depreciation of special equipment		44,000			20,900			8,000			15,100
Salaries of product-line managers		115,000			40,800			38,800			35,400
Allocated common fixed expenses*		186,400			52,600			81,800			52,000
Total fixed expenses		415,600			122,700			169,400			123,500
Net operating income (loss)	$	47,400		$	28,300		$	37,600		$	(18,500)

*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:

Incremental Analysis - Regal Cycle - Racing Bikes
Particulars	Continue Racing Bikes (Alt 1)	Discontinue Racing Bikes (Alt2)	Financial advantage (disadvantage) of discontinuing
Sales	$2,60,000	$0	-$2,60,000
Variable manufacturing and selling expenses	$1,55,000	$0	-$1,55,000
Contribution Margin	$1,05,000	$0	-$1,05,000
Fixed Expenses:
Advertising Traceable	$21,000	$0	-$21,000
Salaries of Product line manager	$35,400	$0	-$35,400
Net Income	$48,600	$0	-$48,600

Financial disadvantage = -$48,600

Solution 2:

No, the production and sale of racing bikes should not be discontinued.

Solution 3:

Regal Cycle Company
Segmanted Income Statement
Particulars	Total	Dirt bikes	Mountain bikes	Racing Bikes
Sales	$9,32,000.00	$2,63,000.00	$4,09,000.00	$2,60,000
Variable Expenses	$4,69,000.00	$1,12,000.00	$2,02,000.00	$1,55,000
Contribution margin	$4,63,000.00	$1,51,000.00	$2,07,000.00	$1,05,000.00
Less: Traceable Fixed Costs:
Advertising	$70,200.00	$8,400.00	$40,800.00	$21,000.00
Depreciation	$44,000.00	$20,900.00	$8,000.00	$15,100.00
Salaries of Product line managers	$1,15,000.00	$40,800.00	$38,800.00	$35,400.00
Total traceable fixed expense	$2,29,200.00	$70,100.00	$87,600.00	$71,500.00
product line Segment Margin	$2,33,800.00	$80,900.00	$1,19,400.00	$33,500.00
Less: Common fixed expenses	$1,86,400.00
Net Operating Profit	$47,400.00