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	$	931,000		$	267,000		$	409,000		$	255,000
Variable manufacturing and selling expenses		461,000			119,000			191,000			151,000
Contribution margin		470,000			148,000			218,000			104,000
Fixed expenses:
Advertising, traceable		69,700			8,900			40,200			20,600
Depreciation of special equipment		43,100			20,300			7,200			15,600
Salaries of product-line managers		114,700			40,500			38,600			35,600
Allocated common fixed expenses*		186,200			53,400			81,800			51,000
Total fixed expenses		413,700			123,100			167,800			122,800
Net operating income (loss)	$	56,300		$	24,900		$	50,200		$	(18,800)

*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

Calculation of Financial Advantage ( Disadvantage Decrease in Contribution Margin 104000 Decreasein Expenses: Advertisement Tracable 20600 Salaries of Product Manager 35600 Total Decrease in Expenses 56200 Decrease in Net operating income: Finanical Disadvantge -47800 Sales Financial Advantage (Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ( $47,800) should the Product and sales of racing Bikes be discontinues ? Answer: No Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes 931000 267000 409000 255000 Varaible Expenses 4610001 119000 191000 151000 Contribution Marrgin (loss) 470000 148000 218000 104000 Fixed Cost Advertisement Tracable 69700 8900 40200 20600 Depreciation on Special Equipment 43100 20300 7200 15600 Salaries of Product Manager 114700 40500 38600 35600 Total Traceable Fixed Expenses 227500 69700 86000 71800 Product line Segment Margin (loss) 242500 783001 132000 32200 common Fixed cost 186200 Net Operating Income (Loss) 56300