Question

Exercise 12-2 Dropping or Retaining a Segment[LO12-2] 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: Sales Dirt Mountain Total Bikes Bikes $ 926,000 $266, 000 $ 484,800 463,800 111,800 193,888 463,890 155,800 211,800 Racing Bikes $ 256, 800 159,808 97,800 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) 69.303 8.403 44,308 20,700 114, 209 40,200 185,289 53,200 413,608 122,5ee 52,800 $ 32,500 $ 4 0.109 20,888 7,709 15,900 38,799 35, 308 89,800 51,200 167,300 123,200 43,708 $(26,200) *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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 1 Required 2 >

Answer 1

Solution 1:

Incremental Analysis - Regal Cycle - Racing Bikes
Particulars	Continue Racing Bikes (Alt 1)	Discontinue Racing Bikes (Alt2)	Financial advantage (disadvantage) of discontinuing
Sales	$2,56,000	$0	-$2,56,000
Variable manufacturing and selling expenses	$1,59,000	$0	-$1,59,000
Contribution Margin	$97,000	$0	-$97,000
Fixed Expenses:
Advertising Traceable	$20,800	$0	-$20,800
Salaries of Product line manager	$35,300	$0	-$35,300
Net Income	$40,900	$0	-$40,900

Financial disadvantage = - $40,900

Solution 2:

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

Solution 3:

Regal Cycle Company
Segmanted Income Statement
Particulars	Total	Dirt bikes	Mountain bikes	Racing Bikes
Sales	$9,26,000	$2,66,000	$4,04,000	$2,56,000
Variable Expenses	$4,63,000	$1,11,000	$1,93,000	$1,59,000
Contribution margin	$4,63,000	$1,55,000	$2,11,000	$97,000
Less: Traceable Fixed Costs:
Advertising	$69,300	$8,400	$40,100	$20,800
Depreciation	$44,300	$20,700	$7,700	$15,900
Salaries of Product line managers	$1,14,200	$40,200	$38,700	$35,300
Total traceable fixed expense	$2,27,800	$69,300	$86,500	$72,000
product line Segment Margin	$2,35,200	$85,700	$1,24,500	$25,000
Less: Common fixed expenses	$1,85,200
Net Operating Profit	$50,000