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	$	922,000		$	263,000		$	403,000		$	256,000
Variable manufacturing and selling expenses		484,000			115,000			209,000			160,000
Contribution margin		438,000			148,000			194,000			96,000
Fixed expenses:
Advertising, traceable		70,000			8,400			40,600			21,000
Depreciation of special equipment		44,100			20,700			7,600			15,800
Salaries of product-line managers		115,500			40,500			38,300			36,700
Allocated common fixed expenses*		184,400			52,600			80,600			51,200
Total fixed expenses		414,000			122,200			167,100			124,700
Net operating income (loss)	$	24,000		$	25,800		$	26,900		$	(28,700)

*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:

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.

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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Sales Variable manufacturing and selling expenses Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Common fixed expenses 0 Net operating income (loss)

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				922,000	666000	-256,000
	Variable expenses				484,000	324000	160,000
	contribution margin (loss)				438,000	342000	-96,000
	fixed expenses
	Advertising,traceable				70,000	49000	21,000
	Depreciation on special equipment				44,100	44,100	0
	Salaries of product managers				115,500	78800	36,700
	common allocated costs				184,400	184,400	0
	total fixed expenses				414,000	356300	57,700
	Net operating income(loss)				24,000	-14300	-38,300
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				922,000	263,000	403,000	256,000
	variable manufacturing and selling expense				484,000	115,000	209,000	160,000
	contribution margin (loss)				438,000	148,000	194,000	96,000
	traceable fixed expenses
	advertising				70,000	8,400	40,600	21,000
	depreciation on special equipment				44,100	20,700	7,600	15,800
	salaries of the product line managers				115,500	40,500	38,300	36,700
	total traceable fixed expenses				229,600	69,600	86,500	73,500
	product line segment margin				208,400	78,400	107,500	22,500
	common fixed expenses				184,400
	net operating income(loss)				24,000
2b)	yes