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. Total $933.000 465, 468,000 Dirt Bikes $266.00 116,eee 150.000 Mountain Bikes $40,000 192,eee 215, eee Racing Bikes $ 260,000 157, e8e 183, eee 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) 69.999 42.988 114.999 186.680 414,300 53.700 8.500 28.430 48.798 53.289 122,890 $ 27.200 49.680 29.999 7.299 15.300 39.988 35.290 81.439 52.888 168,280 123,308 46,900 $ (20,309) $ $ "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? Required 1 Required 2 >

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	933000	673000	-260000
Variable manufacturing and selling expenses	465000	308000	157000
Contribution margin (loss)	468000	365000	-103000
Fixed expenses:
Advertising, traceable	69900	49100	20800
Depreciation on special equipment	42900	42900	0
Salaries of product manager	114900	79700	35200
Common allocated costs	186600	186600	0
Total fixed expenses	414300	358300	56000
Net operating income (loss)	53700	6700	-47000
Financial (disadvantage) $(47000)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	933000	266000	407000	260000
Variable manufacturing and selling expenses	465000	116000	192000	157000
Contribution margin (loss)	468000	150000	215000	103000
Traceable fixed expenses:
Advertising, traceable	69900	8500	40600	20800
Depreciation on special equipment	42900	20400	7200	15300
Salaries of product manager	114900	40700	39000	35200
Total traceable fixed expenses	227700	69600	86800	71300
Product line segment margin	240300	80400	128200	31700
Common fixed expenses	186600
Net operating income (loss)	53700