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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 920,000 $261,000 $ 409,000 $ 250,000 480,000 117,000 206,000 157,000 440,000 144,000 203,000 93,000 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) 69,500 8,200 41,000 20,300 44,300 20,700 7,800 15,800 115,100 40,700 38,900 35,500 184,000 52,200 81,800 50,000 412,900 121,800 169,500 121,600 $ 27,100 $ 22,200 $ 33,500 $(28,600) *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? Financial (disadvantage) per quarter

Answer 1

Solution 1:

Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Financial advantage (disadvantage) of discontinuing racing bikes
Sales	$920,000.00	$670,000.00	-$250,000.00
Variable manufacturing and selling expenses	$480,000.00	$323,000.00	-$157,000.00
Contribution margin	$440,000.00	$347,000.00	-$93,000.00
Fixed expenses:
Advertising traceable	$69,500.00	$49,200.00	-$20,300.00
Depreciation of special equipment	$44,300.00	$44,300.00	$0.00
Salaries of product manager	$115,100.00	$79,600.00	-$35,500.00
Common allocated costs	$184,000.00	$184,000.00	$0.00
Total fixed expenses	$412,900.00	$357,100.00	-$55,800.00
Net Operating income (loss)	$27,100.00	-$10,100.00	-$37,200.00

Solution 2:

As there is net financial disadvantage, therefore production and sale of racing bike should not be discontinued.

Solution 3:

Segmanted Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$920,000.00	$261,000.00	$409,000.00	$250,000.00
Variable manufacturing and selling expenses	$480,000.00	$117,000.00	$206,000.00	$157,000.00
Contribution margin	$440,000.00	$144,000.00	$203,000.00	$93,000.00
Fixed expenses:
Advertising traceable	$69,500.00	$8,200.00	$41,000.00	$20,300.00
Depreciation of special equipment	$44,300.00	$20,700.00	$7,800.00	$15,800.00
Salaries of product manager	$115,100.00	$40,700.00	$38,900.00	$35,500.00
Total traceable fixed expenses	$228,900.00	$69,600.00	$87,700.00	$71,600.00
Segmant income	$211,100.00	$74,400.00	$115,300.00	$21,400.00
Common fixed expenses	$184,000.00
Net Operating income (Loss)	$27,100.00