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			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	933,000		$	264,000		$	410,000		$	259,000
Variable manufacturing and selling expenses		473,000			118,000			198,000			157,000
Contribution margin		460,000			146,000			212,000			102,000
Fixed expenses:
Advertising, traceable		69,800			8,200			41,000			20,600
Depreciation of special equipment		43,800			20,700			7,200			15,900
Salaries of product-line managers		114,500			40,100			38,500			35,900
Allocated common fixed expenses*		186,600			52,800			82,000			51,800
Total fixed expenses		414,700			121,800			168,700			124,200
Net operating income (loss)	$	45,300		$	24,200		$	43,300		$	(22,200)

*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

What impact on net operating income by discountinuningracing bikes Total IF Racing bikes net Operating Difference in Current total Are Droped income Sales 259000 933000 674000 Varaible Expenses 473000 157000 316000 Contribution Marrgin Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager 358000 460000 -102000 69800 49200 20600 43800 43800 114500 78600 35900 Common Allocated Cost 186600 186600 0 Total Fixed Cost Net Operating Income ( Loss) 358200 56500 414700 45300 -45500 -200 Financial Advantage ( Disadvantage) of Drop the Racing Bikes Financial Disadvantage Per Quarter : ( $ 45,500) should the Product and sales of racing Bikes be discontinues? Answer : No

Segmented Income Statement Total Mountain Bikes Racing Bikes Dirt Bikes Sales 933000 259000 264000 410000 Varaible Expenses Contribution Marrgin (loss) Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager Total Traceable Fixed Expenses Product line Segment Margin (loss) 198000 157000 473000 118000 460000 146000 212000 102000 41000 69800 8200 20600 43800 20700 15900 7200 38500 35900 114500 40100 69000 228100 86700 72400 125300 31900 77000 29600 186600 common Fixed cost Net Operating Income ( Loss) 45300