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 Total Bikes Bikes Bikes $935,000 $269,000 $ 410,000 $ 256,000 467,000 119,000 191,000 157,000 468,90 150,000 219,000 99.000 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) 70,000 8,100 40,900 21,000 44,300 20,980 7,900 15,500 115,700 40,700 38,200 36,00 187,000 53,800 82,000 51,200 417,000 123,500 169.000 124,500 $ 51,000 $26,500 $ 50,000 $(25,500) "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

Answer 1

1) Current Total Total if Dropped Effect on net operating income ($256,000) [Racing Bike's share lost] $157,000 [Racing Bike's share decreased and saved] ($99,000) $935,000 $467,000 $468,000 $679,000 $310,000 $369,000 Sales Variable manufacturing and selling ex Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses $70,000 $44,300 $115,700 $187,000 $417,000 $49,000 $44,300 $78,900 $187,000 $359,200 $21,000 [Racing Bike's share decreased and saved] $0 [No effect even if dropped] $36,800 [Racing Bike's share decreased and saved] $0 [No effect even if dropped] $57,800 Net operating income (loss) $51,000 $9,800 ($41,200) Therefore, discontinuing Racing Bikes would decrease Nol by $41200. 2) No. Production of Racing Bikes should not be discontinued as dropping decision results decrease in net operating income.

3) Dirt Bikes Current Total $935,000 $467,000 $468,000 $269,000 $119,000 $150,000 Mountain Racing Bikes Bikes $410,000 $256,000 $191,000 $157,000 $219,000 $99,000 Sales Variable manufacturing and sell. exps Contribution margin Traceable Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Total Traceable Fixed expenses Product line segment margin Common fixed expenses Net operating income (loss) $70,000 $44,300 $115,700 $230,000 $238,000 $187,000 $51,000 $8,100 $20,900 $40,700 $69,700 $80,300 $40,900 $7,900 $38,200 $87,000 $132,000 $21,000 $15,500 $36,800 $73,300 $25,700 (Contribution margin - Traceable fixed exp.] Segmented income statement format would be more usable to management in assessing the long-run profitability of the various product lines.