Question

Exercise 11-2 Dropping or Retaining a Segment (L011-2] 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 Total Bikes $ 925,000 $265,000 469,000 118,000 456,000 147,000 Mountain Racing Bikes Bikes $ 406,000 $ 254,000 192,000 159,000 214,000 95,000 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) 69,000 8,100 43,400 20,500 115,700 40,500 185,000 53,000 413,100 122,100 42,900 $ 24,900 $ 40,300 20,600 7,800 15,100 38,400 36,800 81,200 50,800 167,700 123,300 46,300 $(28,300) $ *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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	925000	671000	-254000
Variable manufacturing and selling expenses	469000	310000	159000
Contribution margin (loss)	456000	361000	-95000
Fixed expenses:
Advertising, traceable	69000	48400	20600
Depreciation on special equipment	43400	43400	0
Salaries of product manager	115700	78900	36800
Common allocated costs	185000	185000	0
Total fixed expenses	413100	355700	57400
Net operating income (loss)	42900	5300	-37600
Financial (disadvantage) $(37600)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	265000	406000	254000
Variable manufacturing and selling expenses	469000	118000	192000	159000
Contribution margin (loss)	456000	147000	214000	95000
Traceable fixed expenses:
Advertising, traceable	69000	8100	40300	20600
Depreciation on special equipment	43400	20500	7800	15100
Salaries of product manager	115700	40500	38400	36800
Total traceable fixed expenses	228100	69100	86500	72500
Product line segment margin	227900	77900	127500	22500
Common fixed expenses	185000
Net operating income (loss)	42900