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 $ 932,000 $269,000 $ 405,000 $ 258,000 460,000 111,000 198,000 151,000 472,000 158,000 207,000 107,000 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) 69,200 8,500 40,200 20,500 43,100 20,200 7,700 15, 200 114,600 40,300 38,700 35,600 186, 400 53,800 81,000 51,600 413,300 122,800 167,600 122,900 $ 58,700 $ 35,200 $ 39,400 $(15,900) *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

Solution 1:

Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Financial advantage (disadvantage) of discontinuing racing bikes
Sales	$932,000.00	$674,000.00	-$258,000.00
Variable manufacturing and selling expenses	$460,000.00	$309,000.00	-$151,000.00
Contribution margin	$472,000.00	$365,000.00	-$107,000.00
Fixed expenses:
Advertising traceable	$69,200.00	$48,700.00	-$20,500.00
Depreciation of special equipment	$43,100.00	$43,100.00	$0.00
Salaries of product manager	$114,600.00	$79,000.00	-$35,600.00
Common allocated costs	$186,400.00	$186,400.00	$0.00
Total fixed expenses	$413,300.00	$357,200.00	-$56,100.00
Net Operating income (loss)	$58,700.00	$7,800.00	-$50,900.00

Solution 2:

as there is net financial disadvantage, therefore production and sale of racing bike should not be discontinued.

Solution 3:

Segmanted Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$932,000.00	$269,000.00	$405,000.00	$258,000.00
Variable manufacturing and selling expenses	$460,000.00	$111,000.00	$198,000.00	$151,000.00
Contribution margin	$472,000.00	$158,000.00	$207,000.00	$107,000.00
Fixed expenses:
Advertising traceable	$69,200.00	$8,500.00	$40,200.00	$20,500.00
Depreciation of special equipment	$43,100.00	$20,200.00	$7,700.00	$15,200.00
Salaries of product manager	$114,600.00	$40,300.00	$38,700.00	$35,600.00
Total traceable fixed expenses	$226,900.00	$69,000.00	$86,600.00	$71,300.00
Segmant income	$245,100.00	$89,000.00	$120,400.00	$35,700.00
Common fixed expenses	$186,400.00
Net Operating income (Loss)	$58,700.00