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 $ 932,000 $267,000 $ 407,000 $ 258,000 475,000 113,000 207,000 155,000 457,000 154,000 200,000 103,000 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) 70,000 8,900 40,500 20,600 44,300 20,900 7,500 15,900 116,300 40,700 38,700 36,900 186,400 53,400 81,400 51,600 417,000 123,900 168,100 125,000 $ 40,000 $ 30,100 $ 31,900 $(22,000) *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 Decreasein Expenses: Advertisement Tracable Salaries of Product Manager Total Decrease in Expenses Decrease in Net operating income: Finanical Disadvantge 103000 20600 36900 57500 -45500 Financial Advantage ( Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ($45500) should the Product and sales of racing Bikes be discontinues? Answer No

Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes 258000 Sales 932000 267000 407000 Varaible Expenses Contribution Marrgin (loss) 207000 475000 113000 155000 457000 154000 200000 103000 Fixed Cost Advertisement Tracable Depreciation on Special Equipment| Salaries of Product Manager Total Traceable Fixed Expenses Product line Segment Margin (loss) 40500 70000 8900 20600 7500 20900 15900 44300 40700 116300 38700 36900 70500 86700 230600 73400 83500 113300 29600 226400 186400 common Fixed cost Net Operating Income ( Loss) 40000