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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 916,000 $261,000 $ 403,000 $ 252,000 480,000 115,000 210,000 155,000 436,000 146,000 193, 000 97,000 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) 69,400 8,600 44,000 20,100 114,400 40,500 183,200 52,200 411,000 121,400 25,000 $ 24,600 $ 40,100 20,700 7,900 16,000 38,600 35,300 80,600 50,400 167,200 122,400 25,800 $(25,400) $ *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

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,16,000	$       6,64,000	$     -2,52,000
	Variable manufacturing and selling expenses	$       4,80,000	$       3,25,000	$       1,55,000
	Contribution margin (loss)	$       4,36,000	$       3,39,000	$         -97,000
	Fixed expenses:
	Advertising, traceable	$           69,400	$           48,700	$           20,700
	Depreciation on special equipment	$           44,000	$           44,000	$                    -
	Salaries of product managers	$       1,14,400	$           79,100	$           35,300
	Allocated common expense	$       1,83,200	$       1,83,200	$                    -
	Total fixed expenses	$       4,11,000	$       3,55,000	$           56,000
	Net operating income (loss)	$           25,000	$         -16,000	$         -41,000
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,16,000	$       2,61,000	$       4,03,000	$       2,52,000
	Variable manufacturing and selling expenses	$       4,80,000	$       1,15,000	$       2,10,000	$       1,55,000
	Contribution margin (loss)	$       4,36,000	$       1,46,000	$       1,93,000	$           97,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,400	$             8,600	$           40,100	$           20,700
	Depreciation on special equipment	$           44,000	$           20,100	$             7,900	$           16,000
	Salaries of product managers	$       1,14,400	$           40,500	$           38,600	$           35,300
	Total traceable fixed expenses	$       2,27,800	$           69,200	$           86,600	$           72,000
	Product line segment margin (loss)	$       2,08,200	$           76,800	$       1,06,400	$           25,000
	Allocated common fixed expense	$       1,83,200
	Net operating income (loss)	$           25,000