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 $ 920,000 $262,000 $ 400,000 $ 258,000 455,000 111,000 191,000 153,000 465,000 151,000 209,000 105,000 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) 69,400 8,300 40,500 20,600 42,500 20,100 7,200 15,200 114,700 40,300 38,600 35,800 184,000 52,400 80,000 51,600 410,600 121,100 166,300 123,200 54,400 $ 29,900 $ 42,700 $(18,200) $ *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	920000	662000	-258000
Variable manufacturing and selling expenses	455000	302000	153000
Contribution margin (loss)	465000	360000	-105000
Fixed expenses:
Advertising, traceable	69400	48800	20600
Depreciation on special equipment	42500	42500	0
Salaries of product manager	114700	78900	35800
Common allocated costs	184000	184000	0
Total fixed expenses	410600	354200	56400
Net operating income (loss)	54400	5800	-48600
Financial (disadvantage) per quarter $(48600)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	920000	262000	400000	258000
Variable manufacturing and selling expenses	455000	111000	191000	153000
Contribution margin (loss)	465000	151000	209000	105000
Traceable fixed expenses:
Advertising, traceable	69400	8300	40500	20600
Depreciation on special equipment	42500	20100	7200	15200
Salaries of product manager	114700	40300	38600	35800
Total traceable fixed expenses	226600	68700	86300	71600
Product line segment margin	238400	82300	122700	33400
Common fixed expenses	184000
Net operating income (loss)	54400