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	$	917,000		$	264,000		$	403,000		$	250,000
Variable manufacturing and selling expenses		468,000			111,000			203,000			154,000
Contribution margin		449,000			153,000			200,000			96,000
Fixed expenses:
Advertising, traceable		69,200			8,600			40,300			20,300
Depreciation of special equipment		43,300			20,700			7,300			15,300
Salaries of product-line managers		115,200			40,600			38,300			36,300
Allocated common fixed expenses*		183,400			52,800			80,600			50,000
Total fixed expenses		411,100			122,700			166,500			121,900
Net operating income (loss)	$	37,900		$	30,300		$	33,500		$	(25,900)

*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.

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

Should the production and sale of racing bikes be discontinued?

	Yesradio button unchecked1 of 2 Noradio button unchecked2 of 2

• 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) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

• 	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Answer 1

What impact on net operating income by discountinuningracing bikes Total IF Racing bikes net Operating Difference in Current totalAre Droped income Sales Varaible Expen Contribution Marrgin Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager Common Allocated Cost Total Fixed Cost Net Operating Income ( Loss 917000 468000 449000 250000 154000 96000 667000 314000 353000 ses 69200 43300 115200 183400 411100 37900 48900 43300 78900 183400 354500 1500 20300 0 36300 0 56600 -39400 1. what is the Financial Advantage ( Disadvantage) of Drop the Racing Bikes Answer: Financial Disadvantage of ($39.400 IF Racing Bikes Discontinued 2. should the Product and sales of racing Bikes be discontinues? Answer: No

Segmented Income Statement Dirt Bikes Total Mountain Bikes Racing Bikes 250000 154000 96000 Sales Varaible Expen Contribution Marrgin loss Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager Total Tracable Fixed Expenses Product line Segment Margin (loss) common Fixed cost Net Operating Income ( Loss) 917000 468000 449000 403000 203000 200000 264000 111000 153000 ses 69200 43300 115200 227700 221300 183400 37900 8600 20700 40600 69900 83100 40300 7300 38300 85900 114100 20300 15300 36300 71900 24100

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