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 $ 927,000 $ 268,000 $ 404,000 $ 255,000 Variable manufacturing and selling expenses 478,000 120,000 199,000 159,000 Contribution margin 449,000 148,000 205,000 96,000 Fixed expenses: Advertising, traceable 70,000 8,600 40,700 20,700 Depreciation of special equipment 43,700 20,200 7,700 15,800 Salaries of product-line managers 116,100 40,900 38,500 36,700 Allocated common fixed expenses* 185,400 53,600 80,800 51,000 Total fixed expenses 415,200 123,300 167,700 124,200 Net operating income (loss) $ 33,800 $ 24,700 $ 37,300 $ (28,200) *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.

Answer 1

Answer 1. Current Total Total if Racing Bikes are dropped 672000 319000 353000 Difference in Net Operating Income -255000 159000 -96000 927000 478000 449000 20700 Sales Variable manufacturing and selling expenses Contribution margin (loss) Fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of product managers Common allocated costs Total fixed expenses Net Operating Income (loss) Financial Disadvantage = $38,600 36 700 70000 43700 116100 185400 415200 33800 49300 43700 79400 185400 357800 4800 57400 -38600 Answer 2. No, Regan Cycle should not drop racing bike. Answer 3. Totals 927000 478000 449000 Dirt Bikes 268000 120000 148000 Mountain Bikes Racing Bikes 404000 1 255000 1 199000 159000 205000 96000 Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of product managers Total traceable fixed expenses Product line segment margin Common fixed expenses Net Operating Income (loss) 70000 43700 116100 229800 219200 185400 33800 8600 20200 40900 69700 78300 40 700 7700 38500 86900 118100 20 700 15800 36700 73 200 22800