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: 2.33 points Dirt Mountain Racing Total Bikes Bikes Bikes $ 923,000 $265,000 $ 405,000 $ 253,000 460,000 115,000 191,000 154,000 463,000 150,000 214,000 eBook 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) Hint 68,700 8,200 40,200 20,300 42,800 20, 2007 , 200 15,400 115,900 40,800 38,300 36,800 184,600 53,000 81,000 50,600 412,000 122,200 166,700 123, 100 $ 51,000 $ 27,800 $ 47,300 $(24,100) Print References *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 99000 Decreasein Expenses: Advertisement Tracable 20300 Salaries of Product Manager 36800 Total Decrease in Expenses 57100 Decrease in Net operating income: -41900 Finanical Disadvantge Financial Advantage (Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ( $41,900) should the Product and sales of racing Bikes be discontinues ? Answer: No

Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 923000 265000 405000 253000 Varaible Expenses 460000 115000 191000 154000 Contribution Marrgin (loss) 463000 150000 214000 99000 Fixed Cost Advertisement Tracable 68700 8200 40200 20300 Depreciation on Special Equipment 42800 20200 7200 15400 Salaries of Product Manager 115900 40800 38300 36800 Total Traceable Fixed Expenses 227400 69200 85700 725001 Product line Segment Margin (loss) 235600 80800 128300 26500 common Fixed cost 184600 Net Operating Income (Loss) 51000