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	$	924,000		$	264,000		$	407,000		$	253,000
Variable manufacturing and selling expenses		458,000			113,000			195,000			150,000
Contribution margin		466,000			151,000			212,000			103,000
Fixed expenses:
Advertising, traceable		69,100			8,400			40,600			20,100
Depreciation of special equipment		43,400			20,500			7,200			15,700
Salaries of product-line managers		115,800			40,500			38,800			36,500
Allocated common fixed expenses*		184,800			52,800			81,400			50,600
Total fixed expenses		413,100			122,200			168,000			122,900
Net operating income (loss)	$	52,900		$	28,800		$	44,000		$	(19,900)

*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

Requirement 1:-

Particulars	Amount
Lost Contribution margin		(103,000)
Avoidable fixed costs
Advertising traceable	20,100
Salary of product line manager	36,500
		56,600
Financial (disadvantage) of discontinuing bikes		(46,400)

The Depreciation on the equipment is a sunk cost and is not relevant to the decision. The common costs are allocated and will continue regardless of whether or not the racing bikes are discontinued. Hence, they are not relevant in our decision making process.

Requirement 2:-

No. it should not be discontinued as there is a Financial disadvantage of discontinuing the racing bikes.

Requirement 3:-

Particulars	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924,000	264,000	407,000	253,000
Variable manufacturing and selling expenses	458,000	113,000	195,000	150,000
Contribution Margin	466,000	151,000	212,000	103,000
Traceable fixed expenses
Advertisting, traceable	69,100	8,400	40,600	20,100
Depreciation of special equipment	43,400	20,500	7,200	15,700
Salaries of production line managers	115,800	40,500	38,800	36,500
Total traceable fixed expenses	228,300	69,400	86,600	72,300
Product line segment margin(loss)	237,700	81,600	1,25,400	30,700
Common fixed expenses	184,800			`
Net Operating Income (Loss)	52,900

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