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 $ 934,000 $265,000 $ 410,000 $ 259,000 462,000 116,000 193,000 153,000 472,000 149,000 217,000 106,000 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) 69,700 8,400 40,800 20,500 43,400 20,500 7,500 15,400 115,300 40,900 38,100 36,300 186,800 53,000 82,000 51,800 415,200 122,800 168,400 124,000 $ 56,800 $ 26,200 $ 48,600 $(18,000) *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.

Should the production and sale of racing bikes be discontinued?

Answer 1

Total If Current Total Racing Bikes Are Dropped $ 934,000 $ 675,000 $ 462,000 $ 309,000 $ 472,000 $ 366,000 Difference: Net Total If Racing Bikes Operating Income Are Dropped (Dirt Increase or Bikes + Mountain (Decrease) Bikes) $ (259,000) ($ 265,000 + $ 410,000) $ (153,000)|($ 116,000 + $ 193,000) $ (106,000) Sales Variable manufacturing and selling epenses Contribution margin (loss) Fixed expenses: Advertising, traceable Deprecition of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses Net operating income (loss) $ $ $ $ $ $ 69,700 43,400 115,300 186,800 415,200 56,800 $ $ $ $ $ $ 49,200 28,000 79,000 186,800 343,000 23,000 $ $ $ $ $ $ (20,500) ($ 8,400 + $ 40,800) (15,400) ($ 20,500 + $ 7,500) (36,300) ($ 40,900 + $ 38,100) Unavoidable (72,200) (33,800) 1. Financial disadvantage of discontinuing of production and sale of racing bikes is ($ 33,800). 2. No. The production and sale of Racing bikes should not be discountinued, as it would result in a decrease in net operating income by $ 33,800.

Mountain Bikes $ 410,000 193,000 $ 217,000 Racing Bikes 259,000 153,000 106,000 $ Segmented Income Statement Totals Dirt Bikes Sales $ 934,000$ 265,000 Variable manufacturing and selling epenses $ 462,000 $ 116,000 Contribution margin (loss) $ 472,000 $ 149,000 Traceable Fixed expenses: Advertising, traceable $ 69,700 $ 8,400 Deprecition of special equipment $ 43,400 $ 20,500 Salaries of product-line managers $ 115,300 $ 40,900 Total traceable fixed expenses $ 228,400 $ 69,800 Segmented Net operating income (loss) $ 243,600 $ 79,200 Common fixed expenses $ 186,800 Net operating income (loss) $ 56,800 $ $ $ $ $ 40,800 7,500 38,100 86,400 130,600 $ $ $ 20,500 15,400 36,300 72,200 33,800 Yes. Segment income statement would be more usable to management in assessing the long-run profitability of the various product lines, as even Racing bikes has a Segment Net operating income of $ 33,800. Also, segment income statement considers common fixed costs separately, showing the true picture of each segment.