Question

11-1

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:

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 $ 922,000 $263, 000 $ 408,000 $ 251,000 477,000 111,000 206,000 160,000 445,000 152,000 202,000 91,000 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) 69,500 8,700 40, 400 20,400 43, 700 20,800 7,700 15, 200 114,900 40, 200 39,000 35,700 184,400 52, 600 81,600 50,200 412,500 122,300 168, 700 121,500 $ 32,500 $ 29,700 $ 33,300 $(30,500) *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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3

Answer 1

1
	Current total	Total if racing bikes are Dropped	Net operating income Increase/(Decrease)
Sales	922000	671000	-251000
Variable Expenses	477000	317000	160000
Contribution margin (Loss)	445000	354000	-91000
Fixed Expenses:
Advertising, Traceable	69500	49100	20400
Depreciation on special equipment	43700	43700
Salaries of production managers	114900	79200	35700
Common allocated costs	184400	184400
Total Fixed expenses	412500	356400	56100
Net operating income (Loss)	32500	-2400	-34900
1 (b)	No

2
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922000	263000	408000	251000
Variable manufacturing and selling expenses	477000	111000	206000	160000
Contribution Margin	445000	152000	202000	91000
Traceable fixed expenses
Advertising	69500	8700	40400	20400
Depreciation of special equipment	43700	20800	7700	15200
Salaries of product line managers	114900	40200	39000	35700
Total traceable fixed expenses	228100	69700	87100	71300
Product line segment margin	216900	82300	114900	19700
Common fixed expenses	184400
Net operating income	32500