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 $ 921,000 $268,000 $ 403,000 $ 250,000 470,000 112,000 204,000 154,000 451,000 156,000 199,000 96,000 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) 69,600 8,400 40,300 43,100 20,800 7,200 115,400 40,800 38,200 184,200 53,600 80,600 412,300 123,600 166,300 $ 38,700 $ 32,400 $ 32,700 20,900 15,100 36,400 50,000 122,400 $(26,400)

*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

olution 1:

Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Difference: Net Operating income increase (decrease)
Sales	$921,000	$671,000	-$250,000
Variable manufacturing and selling expenses	$470,000	$316,000	-$154,000
Contribution margin	$451,000	$355,000	-$96,000
Fixed expenses:
Advertising traceable	$69,600	$48700	-$20,900
Depreciation of special equipment	$43,100	$43,100	$0.00
Salaries of product line manager	$115,400	$79000	-$36,400
Common allocated costs	$184,200	$184,200	$0.00
Total fixed expenses	$412,300	$355,000	-$57,300
Net Operating income (loss)	$38,700	$0	-$38,700

Solution 2:

As there is net financial disadvantage of $38700, therefore racing bike should not be discontinued.

Solution 3:

Segmented Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$921,000	$268,000	$403,000	$250,000
Variable manufacturing and selling expenses	$470,000	$112,000	$204,000	$154,000
Contribution margin	$451,000	$156,000	$199,000	$96,000
Fixed expenses:
Advertising traceable	$69,600	$8,400	$40,300	$20,900
Depreciation of special equipment	$43,100	$20,800	$7,200	$15,100
Salaries of product manager	$115,400	$40,800	$38,200	$36,400
Total traceable fixed expenses	$228,100	$70000	$85700	$72,400
Segment income	$222900	$86000	$113300	$23600
Common fixed expenses	$184,200
Net Operating income (Loss)	$38,700