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:

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 $ 267,000 $ 401,000 $ 260,000 Variable manufacturing and selling expenses 458,000 113,000 193,000 152,000 Contribution margin 470,000 154,000 208,000 108,000 Fixed expenses: Advertising, traceable 70,000 8,700 40,900 20,400 Depreciation of special equipment 43,100 20,800 7,200 15,100 Salaries of product-line managers 114,800 40,800 38,900 35,100 Allocated common fixed expenses* 185,600 53,400 80,200 52,000 Total fixed expenses 413,500 123,700 167,200 122,600 Net operating income (loss) $ 56,500 $ 30,300 $ 40,800 $ (14,600) *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.

*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. 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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	928000	668000	-260000
Variable manufacturing and selling expenses	458000	306000	152000
Contribution margin (loss)	470000	362000	-108000
Fixed expenses:
Advertising, traceable	70000	49600	20400
Depreciation on special equipment	43100	43100	0
Salaries of product manager	114800	79700	35100
Common allocated costs	185600	185600	0
Total fixed expenses	413500	358000	55500
Net operating income (loss)	56500	4000	-52500
Financial (disadvantage) per quarter $(52500)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	928000	267000	401000	260000
Variable manufacturing and selling expenses	458000	113000	193000	152000
Contribution margin (loss)	470000	154000	208000	108000
Traceable fixed expenses:
Advertising, traceable	70000	8700	40900	20400
Depreciation on special equipment	43100	20800	7200	15100
Salaries of product manager	114800	40800	38900	35100
Total traceable fixed expenses	227900	70300	87000	70600
Product line segment margin	242100	83700	121000	37400
Common fixed expenses	185600
Net operating income (loss)	56500