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	$	920,000		$	265,000		$	403,000		$	252,000
Variable manufacturing and selling expenses		466,000			120,000			190,000			156,000
Contribution margin		454,000			145,000			213,000			96,000
Fixed expenses:
Advertising, traceable		69,300			8,400			40,700			20,200
Depreciation of special equipment		43,800			20,600			7,400			15,800
Salaries of product-line managers		114,200			40,300			38,100			35,800
Allocated common fixed expenses*		184,000			53,000			80,600			50,400
Total fixed expenses		411,300			122,300			166,800			122,200
Net operating income (loss)	$	42,700		$	22,700		$	46,200		$	(26,200)

*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.

req 1

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

req 2

Should the production and sale of racing bikes be discontinued?

req 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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 0 $0 $0 $0 Net operating income (loss) $0

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	920000	668000	-252000
Variable manufacturing and selling expenses	466000	310000	156000
Contribution margin (loss)	454000	358000	-96000
Fixed expenses:
Advertising, traceable	69300	49100	20200
Depreciation on special equipment	43800	43800	0
Salaries of product manager	114200	78400	35800
Common allocated costs	184000	184000	0
Total fixed expenses	411300	355300	56000
Net operating income (loss)	42700	2700	-40000
Financial (disadvantage) $(40000)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	920000	265000	403000	252000
Variable manufacturing and selling expenses	466000	120000	190000	156000
Contribution margin (loss)	454000	145000	213000	96000
Traceable fixed expenses:
Advertising, traceable	69300	8400	40700	20200
Depreciation on special equipment	43800	20600	7400	15800
Salaries of product manager	114200	40300	38100	35800
Total traceable fixed expenses	227300	69300	86200	71800
Product line segment margin	226700	75700	126800	24200
Common fixed expenses	184000
Net operating income (loss)	42700