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 $ 924,000 $269,000 $ 402,000 $ 253,000 475,000 112,000 205,000 158,000 449,000 157,000 197,000 9 5,000 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) 69,900 8,700 43,900 20,300 116,000 40,700 184,800 53,800 414,600 123,500 34,400 $ 33,500 $ 40,600 20,600 7,700 15,900 38,900 36,400 80,400 50,600 167,600 123,500 29,400 $(28,500) $ *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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Answer 1

1.)Contribution margin of Racing Bikes = $95,000

Traceable fixed costs of Racing bikes = Advertising + Depreciation of special equipment + Salaries of product line managers

= 20,600 + 15,900 + 36,400

= $72,900

Hence, segment margin of Racing bikes = Contribution margin - Traceable fixed costs

= 95,000 - 72,900

= $22,100

Hence, financial disadvantage if Racing bikes is discontinued = $22,100

2.)If Racing bikes is discontinued, there will be loss of margin of $22,100 provided by the Racing bikes. Hence Racing bikes should not be discontinued.

3.) Segmented income statement

	Totals	Dirt bikes	Mountain bikes	Racing bikes
Sales (i)	924,000	269,000	402,000	253,000
Variable manufacturing and selling expenses (ii)	475,000	112,000	205,000	158,000
Contribution margin (i) - (ii) = (iii)	449,000	157,000	197,000	95,000
Traceable fixed costs:
Advertising	69,900	8,700	40,600	20,600
Depreciation of special equipment	43,900	20,300	7,700	15,900
Salaries of product line managers	116,000	40,700	38,900	36,400
Total traceable fixed expenses (iv)	229,800	69,700	87,200	72,900
Product line segment margin (iii)- (iv) = (v)	219,200	87,300	109,800	22,100
Allocated common fixed expenses (vi)	184,800	53,800	80,400	50,600
Net operating profit (loss) (v) - (vi)	34,400	33,500	29,400	(28,500)