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 Racing Mountain Bikes Bikes Bikes Total $933,000 $266,000 $408,000 259,000 Sales Variable manufacturing and selling 150,000 463,000 115,000 198,000 expenses Contribution margin Fixed expenses: 470,000 151,000 210,000 109,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers 69,900 43,700 113,800 186,600 40,500 21,000 15,600 8,400 20,800 7,300 40,200 53,200 38,400 35,200 Allocated common fixed expenses* 81,600 51,800 Total fixed expenses 414,000 122,600 167,800 123,600 $56,000 $ 28,400 $ 42,200 $ (14,600) Net operating income (loss) *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
Sales	933000	674000	-259000
Variable manufacturing and selling expenses	463000	313000	150000
Contribution margin (loss)	470000	361000	-109000
Fixed expenses:
Advertising, traceable	69900	48900	21000
Depreciation on special equipment	43700	43700	0
Salaries of product manager	113800	78600	35200
Common allocated costs	186600	186600	0
Total fixed expenses	414000	357800	56200
Net operating income (loss)	56000	3200	-52800
Financial (disadvantage) $(52800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	933000	266000	408000	259000
Variable manufacturing and selling expenses	463000	115000	198000	150000
Contribution margin (loss)	470000	151000	210000	109000
Traceable fixed expenses:
Advertising, traceable	69900	8400	40500	21000
Depreciation on special equipment	43700	20800	7300	15600
Salaries of product manager	113800	40200	38400	35200
Total traceable fixed expenses	227400	69400	86200	71800
Product line segment margin	242600	81600	123800	37200
Common fixed expenses	186600
Net operating income (loss)	56000