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 $ 929,000 $ 269,000 $ 408,000 $ 252,000 Variable manufacturing and selling expenses 464,000 117,000 194,000 153,000 Contribution margin 465,000 152,000 214,000 99,000 Fixed expenses: Advertising, traceable 69,500 8,500 40,900 20,100 Depreciation of special equipment 43,500 20,200 7,800 15,500 Salaries of product-line managers 116,600 40,900 38,700 37,000 Allocated common fixed expenses* 185,800 53,800 81,600 50,400 Total fixed expenses 415,400 123,400 169,000 123,000 Net operating income (loss) $ 49,600 $ 28,600 $ 45,000 $ (24,000) *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 99000 Decreasein Expenses: Advertisement Tracable 20100 Salaries of Product Manager 37000 Total Decrease in Expenses 57100 Decrease in Net operating income: Finanical Disadvantge -41900 Financial Advantage ( Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ($41,900) should the Product and sales of racing Bikes be discontinues ? Answer: No Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 929000 269000 408000 252000 Varaible Expenses 464000 117000 194000 153000 Contribution Marrgin (loss) 465000 1520001 214000 990001 Fixed Cost Advertisement Tracable 69500 8500 40900 201001 Depreciation on Special Equipment 43500 20200 7800 15500 Salaries of Product Manager 116600 40900 38700 370001 Total Traceable Fixed Expenses 229600 69600 87400 72600 Product line Segment Margin (loss) 235400 82400 126600 26400 common Fixed cost 185800 Net Operating Income (Loss) 49600