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 Bikes Total Bikes Bikes Sales Variable manufacturing and selling $921,000 $264,000 407,000 250,000 475,000 118,000 201,000 156,000 expenseS Contribution margin Fixed expenses: 446,000 146,000 206,000 94,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,900 7,500 38,900 81,400 412,500 121,800 168,700 70,300 20,900 15,900 35,200 50,000 122,000 $ 33,500 24,200 37,300 $(28,000) 8,500 43,700 20,300 114,300 40,200 52,800 184,200 Total fixed expenses 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 Complete this question by entering your answers in the tabs below Required 1Required 2 Required3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Financial (disadvantage) per quarter

Answer 1

Req 1:
Financial advantage/(Disadvantage):
Loss of revenue of racing bike segment					-250000
Less: Savings in cost
V variable manufacturing and selling cost					156000
Savings in advertisement expense					20900
Savings in Product line managers					35200
Financial disadvantage of Discontinuance					-37900
Hence, Segment Raciing bikes shall not be discontinued.
SEGMENT-WISE INCOME STATEMENT OF ROCKY MOUNTAIN REGION
				TOTAL	Dirt Bikes	Mountain	Racing bikes
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				921,000	264,000	407,000	250,000
Less: Variable cost				475,000	118,000	201,000	156,000
Contribution margin				446,000	146,000	206,000	94,000
Less: Traceable Fixed cost
Advertisement expense				70,300	8,500	40,900	20,900
Depreciation expense				43,700	20,300	7,500	15,900
Salaries of product line manager				114,300	40,200	38,900	35,200
SEGMENT MARGIN				217,700	77,000	118,700	22,000
Less: Common Fixed expense				184,200
Net Operating Income				33,500