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	$	917,000		$	266,000		$	400,000		$	251,000
Variable manufacturing and selling expenses		464,000			116,000			196,000			152,000
Contribution margin		453,000			150,000			204,000			99,000
Fixed expenses:
Advertising, traceable		69,200			8,200			40,500			20,500
Depreciation of special equipment		44,300			21,000			7,500			15,800
Salaries of product-line managers		114,200			40,200			38,700			35,300
Allocated common fixed expenses*		183,400			53,200			80,000			50,200
Total fixed expenses		411,100			122,600			166,700			121,800
Net operating income (loss)	$	41,900		$	27,400		$	37,300		$	(22,800)

*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

Answer:

1

		Total
	Total	If racing bike are dropped	Diffrance: net operating incmoe incfese (decrese)
Sales	917000	666000	-251000
Variable manufacturing and selling expenses	464000	312000	152000
Contribution margin	453000	354000	-99000
Fixed expenses:
Advertising, traceable	69200	48700	20500
Depreciation of special equipment	44300	44300	0
Salaries of product-line managers	114200	78900	35300
Allocated common fixed expenses*	183400	183400	0
Total fixed expenses	411100	355300	55800
Net operating income (loss)	41900	-1300	-43200

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2

2. Should the production and sale of racing bikes be discontinued?

Answer:

No, production and sale of the racing bikes should not be discontinued.

If the racing bikes were discontinued, then the net operating income for the company as a whole would decrease by $(43,200) each quarter:

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3

segmented income statement.
	Total	Dirt Bike	Mountain Bikes	Racing Bikes
Sales	917000	266000	400000	251000
Variable manufacturing and selling expenses	464000	116000	196000	152000
Contribution margin	453000	150000	204000	99000
Fixed expenses:
Advertising, traceable	69200	8200	40500	20500
Depreciation of special equipment	44300	21000	7500	15800
Salaries of product-line managers	114200	40200	38700	35300
Total Tracable Fixed cost	227700	69400	86700	71600
Product segment Margin	225300	80600	117300	27400
common fixed expenses	183400
Net operating income (loss)	41900