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:

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	927,000		$	265,000		$	410,000		$	252,000
Variable manufacturing and selling expenses		471,000			112,000			201,000			158,000
Contribution margin		456,000			153,000			209,000			94,000
Fixed expenses:
Advertising, traceable		69,400			8,200			40,400			20,800
Depreciation of special equipment		43,600			20,300			7,700			15,600
Salaries of product-line managers		115,400			40,300			38,400			36,700
Allocated common fixed expenses*		185,400			53,000			82,000			50,400
Total fixed expenses		413,800			121,800			168,500			123,500
Net operating income (loss)	$	42,200		$	31,200		$	40,500		$	(29,500)

*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.

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. Dirt Bikes Totals Mountain Bikes Racing Bikes Contribution margin (loss) 0 Traceable fixed expenses: Total traceable fixed expenses 0 Product line segment margin (loss) $ $ $ 0 Net operating income (loss) S

Answer 1

Answer 1. Current Total Total if Racing Bikes are dropped 675000 313000 362000 Difference in Net Operating Income -252000 158000 -94000 927000 471000 456000 20800 Sales Variable manufacturing and selling expenses Contribution margin (loss) Fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of product managers Common allocated costs Total fixed expenses Net Operating Income (loss) Financial Disadvantage = $36,500 36700 69400 43600 115400 185400 413800 42200 48600 43600 78700 185400 356300 5700 57500 -36500 Answer 2. No, Regan Cycle should not drop racing bike. Answer 3. Totals 927000 471000 456000 Dirt Bikes 265000 112000 153000 Mountain Bikes Racing Bikes 410000 252000 201000 158000 209000 94000 Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of product managers Total traceable fixed expenses Product line segment margin Common fixed expenses Net Operating Income (loss) 69400 43600 115400 228400 227600 185400 42200 8200 20300 40300 68800 84200 40400 7700 38400 86500 122500 20800 15600 36700 73100 20900