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 $ 930,000 $266,000 $ 404,000 $ 260,000 480,000 116,000 208,000 156,000 450,000 150,000 196,000 104,000 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) 8,400 43,500 20,500 114,200 40,600 186,000 53,200 413,200 122,700 36,800 $ 27,300 $ 40,200 7,300 38,300 80,800 166,600 29,400 20,900 15,700 35,300 52,000 123,900 $(19,900) $ *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

Calculation of Financial Advantage (Disadvantage) Decrease in Contribution Margin 104000 Decreasein Expenses: Advertisement Tracable 20900 Salaries of Product Manager 35300 Total Decrease in Expenses 56200 Decrease in Net operating income: -47800 Finanical Disadvantge Financial Advantage (Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ( $47,800) should the Product and sales of racing Bikes be discontinues ? Answer: No Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 930000 266000 4 04000 260000 Varaible Expenses 480000 116000 2 080001 156000 Contribution Marrgin (loss) 4 50000|| 150000 196000 104000 Fixed Cost Advertisement Tracable 69500 84001 402001 20900 Depreciation on Special Equipment 43500 20500 73001 15700 Salaries of Product Manager 40600 3 8300 35300 Total Traceable Fixed Expenses 1 227200 69500 85800 71900 Product line Segment Margin (loss) 222800 80500 11020032100 common Fixed cost 1860001 Net Operating Income (Loss) 36800