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 Total Bikes $ 933,000 $270,000 469,000 110,000 464,000 160,000 Mountain Racing Bikes Bikes $ 409,000 $ 254,000 208,000 151,000 201,000 103,000 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) 69,600 43,600 114,800 186,600 414,600 $ 49,400 8,500 40,800 20,400 7,400 40,800 38,800 54,000 81,800 123,700 168,800 $ 36,300 $ 32,200 20, 300 15,800 35, 200 50, 800 122,100 $ (19,100) *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. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? 1 Required 1 Required 2 Required 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. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 0 0 Contribution margin (loss) Traceable fixed expenses: 0 0 0 0 Total traceable fixed expenses Product line segment margin (loss) 0 $ 0 $ 0 $ 0 Net operating income (loss) $ 0

Answer 1

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,33,000	$       6,79,000	$     -2,54,000
	Variable manufacturing and selling expenses	$       4,69,000	$       3,18,000	$       1,51,000
	Contribution margin (loss)	$       4,64,000	$       3,61,000	$     -1,03,000
	Fixed expenses:
	Advertising, traceable	$           69,600	$           49,300	$           20,300
	Depreciation on special equipment	$           43,600	$           43,600	$                    -
	Salaries of product managers	$       1,14,800	$           79,600	$           35,200
	Allocated common expense	$       1,86,600	$       1,86,600	$                    -
	Total fixed expenses	$       4,14,600	$       3,59,100	$           55,500
	Net operating income (loss)	$           49,400	$             1,900	$         -47,500
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,33,000	$       2,70,000	$       4,09,000	$       2,54,000
	Variable manufacturing and selling expenses	$       4,69,000	$       1,10,000	$       2,08,000	$       1,51,000
	Contribution margin (loss)	$       4,64,000	$       1,60,000	$       2,01,000	$       1,03,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,600	$             8,500	$           40,800	$           20,300
	Depreciation on special equipment	$           43,600	$           20,400	$             7,400	$           15,800
	Salaries of product managers	$       1,14,800	$           40,800	$           38,800	$           35,200
	Total traceable fixed expenses	$       2,28,000	$           69,700	$           87,000	$           71,300
	Product line segment margin (loss)	$       2,36,000	$           90,300	$       1,14,000	$           31,700
	Allocated common fixed expense	$       1,86,600
	Net operating income (loss)	$           49,400

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