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 Mountain Dirt Racing Bikes Total Bikes Bikes 920,000 $ 262,000 404,000 254,000 Sales Variable manufacturing and selling expenses Contribution margin 469,000 115,000 197,000 157,000 451,000 147,000 207,000 97,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses 8,300 40,200 69,300 43,500 114,700 184,000 20,800 15,900 35,600 50,800 123,100 20,500 40,800 52,400 7,100 38,300 80,800 411,500 122,000 166,400 39,500 25,000 $ 40,600 $(26,100) Net operating income (loss) *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.

Format for Req 3 is as follows

Answer 1

As the question is asking only 3rd requirement, i am going for it,

	Totals	Dirt bikes	Mountain bikes	Racing bikes
Sales	920,000	262,000	404,000	254,000
Variable manufacturing and selling Expenses	469,000	115,000	197,000	157,000
Contribution margin (loss)	451,000	147,000	207,000	97,000
Advertising, traceable	69,300	8,300	40,200	20,800
Depreciation on special equipment	43,500	20,500	7,100	15,900
Salaries of product line managers	114,700	40,800	38,300	35,600
Total traceable fixed Expenses	227,500	69,600	85,600	72,300
Product line segment margin(loss)	223,500	77,400	121,400	24,700
Common fixed Expenses	184,000
Net operating income	39,500

Product line segment margin is calculated only by deducting traceable and identifiable fixed costs to the particular products, non traceable fixed costs or common fixed costs are not considered for arriving at product specific costs.