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 Bikes $ 923,000 $261,000 $ 407,000 255,000 Total Bikes Bikes Sales Variable manufacturing and selling 458,000 115,000 expenses 191,000 152,000 Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-1ine managers Allocated common fixed expenses Total fixed expenses 465,000 146,000 216,000 103,000 69,600 43,500 115,900 184,600 413,600 8,200 20,200 40,300 52,200 120,900 $ 51,400 25,100 47,900 $(21,600) 40,700 7,300 38,700 20,700 16,000 36,900 51,000 81,400 168,100 124,600 Net operating income (1oss) "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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	923000	668000	-255000
Variable manufacturing and selling expenses	458000	306000	152000
Contribution margin (loss)	465000	362000	-103000
Fixed expenses:
Advertising, traceable	69600	48900	20700
Depreciation on special equipment	43500	43500	0
Salaries of product manager	115900	79000	36900
Common allocated costs	184600	184600	0
Total fixed expenses	413600	356000	57600
Net operating income (loss)	51400	6000	-45400
Financial (disadvantage) $(45400)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	923000	261000	407000	255000
Variable manufacturing and selling expenses	458000	115000	191000	152000
Contribution margin (loss)	465000	146000	216000	103000
Traceable fixed expenses:
Advertising, traceable	69600	8200	40700	20700
Depreciation on special equipment	43500	20200	7300	16000
Salaries of product manager	115900	40300	38700	36900
Total traceable fixed expenses	229000	68700	86700	73600
Product line segment margin	236000	77300	129300	29400
Common fixed expenses	184600
Net operating income (loss)	51400