Question

Exercise 11-2 Dropping or Retaining a Segment [LO11-2] 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 $ 926,000 461,000 465,000 Dirt Mountain Bikes Bikes $268.000 $ 406,000 113,000 197.000 155,000 209,000 Racing Bikes 5 252.000 151,000 101.000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses Advertising, traceable Depreciation of special equipment Salaries of product line managers Allocated on fixed expenses Total fixed expenses Net operating income (loss) 69,100 44,200 114,700 185,200 413,200 51. 20.500 40.00 53,600 123,100 31.90 40,300 7.600 38.500 81,200 167,600 41.400 20,500 15,800 35. 50,400 122,500 (21,500) $ "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

Solution 1:

Impact on net income on discontinuing racing bike
Particulars	Current Total	Total if racing bikes are dropped	Financial advantage (disadvantage) of discontinuing racing bikes
Sales	$926,000.00	$674,000.00	-$252,000.00
Variable manufacturing and selling expenses	$461,000.00	$310,000.00	-$151,000.00
Contribution margin	$465,000.00	$364,000.00	-$101,000.00
Fixed expenses:
Advertising traceable	$69,100.00	$48,600.00	-$20,500.00
Depreciation of special equipment	$44,200.00	$44,200.00	$0.00
Salaries of product manager	$114,700.00	$78,900.00	-$35,800.00
Common allocated costs	$185,200.00	$185,200.00	$0.00
Total fixed expenses	$413,200.00	$356,900.00	-$56,300.00
Net Operating income (loss)	$51,800.00	$7,100.00	-$44,700.00

Solution 2:

As there is net financial disadvantage, therefore production and sale of racing bikes should not be discontinued.

Solution 3:

Segmanted Income Statement
Particulars	Total	Dirt Bikes	Mountaing Bikes	Racing Bikes
Sales	$926,000.00	$268,000.00	$406,000.00	$252,000.00
Variable manufacturing and selling expenses	$461,000.00	$113,000.00	$197,000.00	$151,000.00
Contribution margin	$465,000.00	$155,000.00	$209,000.00	$101,000.00
Fixed expenses:
Advertising traceable	$69,100.00	$8,300.00	$40,300.00	$20,500.00
Depreciation of special equipment	$44,200.00	$20,800.00	$7,600.00	$15,800.00
Salaries of product manager	$114,700.00	$40,400.00	$38,500.00	$35,800.00
Total traceable fixed expenses	$228,000.00	$69,500.00	$86,400.00	$72,100.00
Segmant income	$237,000.00	$85,500.00	$122,600.00	$28,900.00
Common fixed expenses	$185,200.00
Net Operating income (Loss)	$51,800.00