Question

Exercise 11-2 Dropping or Retaining a Segment (LO11-2] 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 $ 916,000 $262,000 $ 404,000 $ 250,000 462,000 115,000 191,000 156,000 454,000 147,000 213,000 94,000 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 8,500 40,400 20,700 43,600 20,700 7,200 15,700 114,500 40,200 38,700 35,600 LOS, 200 52,400 80,800 50,000 410,900 121,800 167,100 122,000 $ 43,100 $ 25,200 $ 45,900 $(28,000) *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:

G 1 2 Incremental Anal ysi s - Regal Cycle - Racing Bikes Continue Racing 3 Discontinue Racing Financial advantage Bikes (Alt2) Particulars (disadvantage) of discontinuing -$250,000 -$156,000 -$94,000 Bikes (Alt 1) $250,000 $156,000 $94,000 Sales 6 Variable man ufactu ri ng and selling 7 Contribution Margin 8 Fixed Expenses: 9 Advertising Trace able 10 Salaries of Product line manager $0 5 $0 $0 $20,700 $35,600 -$20,700 -$35,600 $0 $0 11 $37,700 $0 -$37,700 12 Net Income 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 -) Sheet43 (3) Sheet449 Sheet53 Sheet55 Shee

Financial Disadvantage = - $37,700

Solution 2:

No, the production and sale of racing bikes should not be discontinued.

Solutiin 3:

M N 7 8 9 10 11 12 Regal Cycle Company 13 14 Segmanted Income Statement Dirt bikes $262,000 $115,000 $147,000 15 Particulars Total Mountain bikes Racing Bikes $250,000 $156,000 $94,000 $404,000 $191,000 $213,000 $916,000 $462,000 $454,000 Sales Variable Expens es Contribution margin Less: Traceable Fixed Costs: Advertising Depreciation Salaries of Product line managers Total traceable fixed expense product line Segment Margin Less: Common fixed expenses 16 17 18 19 $8,500 $20,700 $40,200 $69,400 $77,600 $20,700 $15,700 $35,600 $72,000 $22,000 $69,600 $43,600 $114,500 $227,700 $226,300 $183,200 $40,400 $7,200 $38,700 $86,300 $126,700 20 21 22 23 24 25 26 $43,100 27 Net Operating Profit 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 Sheet43 (3) -) Sheet449 Sheet53 Sheet55 Shee