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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 923,000 $266,000 $ 400,000 $ 257,000 467,000 113,000 199,000 155,000 456,000 153,000 201,000 102,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 69,000 8,600 40,100 20,300 43,400 20,100 7,800 15,500 115,700 40,900 38,600 36,200 184,600 53,200 51,400 412,700 122,800 166,500 123,400 $ 43,300 $ 30,200 $ 34,500 $(21,400) *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

			Current total	total if racing bikes are dropped	Defference
sales			923000	666000	-257000
variable cost			467000	312000	155000
contribution			456000	354000	-102000
Fixed expenses
advertising ,traceable			69000	48700	20300
depreciation			43400	43400	0
salaries			115700	79500	36200
allocated cost			184600	184600	0
Total fixed expenses			412700	356200	56500
net operating income			43300	-2200	-45500
net operating income decrease by 45500 if bike racing discontinued
2) production & sale of racing bike should not be discontinued
3)			total	Dirt bikes	mountain bikes	racing bike
sales			923000	266000	400000	257000
variable manufacturing & selling exp			467000	113000	199000	155000
contribution margin			456000	153000	201000	102000
traceable fixed expenses
advertising			69000	8600	40100	20300
depreciation on special equipment			43400	20100	7800	15500
salary of product manager			115700	40900	38600	36200
total traceable fixed expenses			228100	69600	86500	72000
product line segment margin			227900	83400	114500	30000
common fixed expensess			184600
net operating income (loss)			43300

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