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	$	921,000		$	262,000		$	402,000		$	257,000
Variable manufacturing and selling expenses		483,000			117,000			208,000			158,000
Contribution margin		438,000			145,000			194,000			99,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,600			20,500
Depreciation of special equipment		44,000			20,900			7,700			15,400
Salaries of product-line managers		115,100			40,800			38,300			36,000
Allocated common fixed expenses*		184,200			52,400			80,400			51,400
Total fixed expenses		412,900			122,600			167,000			123,300
Net operating income (loss)	$	25,100		$	22,400		$	27,000		$	(24,300)

*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 20500 Salaries of Product Manager 36000 Total Decrease in Expenses 56500 Decrease in Net operating income: -42500 Finanical Disadvantge Financial Advantage (Disadvantage of Drop the Racing Bikes Financial Disadvantage : ( $42,500) should the Product and sales of racing Bikes be discontinues ? Answer : No

Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 921000 262000 402000 257000 Varaible Expenses 483000 117000 208000 158000 Contribution Marrgin (loss) 438000 145000 194000 99000 Fixed Cost Advertisement Tracable 69600 8500 40600 20500 Depreciation on Special Equipment 44000 20900 7700 15400 Salaries of Product Manager 115100 40800 38300 36000 Total Traceable Fixed Expenses 228700 70200 86600 71900 Product line Segment Margin (loss) 209300 74800 107400 27100 common Fixed cost 184200 Net Operating Income (Loss) 25100