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 $ 932,000 $ 269,000 $ 406,000 $ 257,000 Variable manufacturing and selling expenses 479,000 116,000 210,000 153,000 Contribution margin 453,000 153,000 196,000 104,000 Fixed expenses: Advertising, traceable 69,600 8,600 40,500 20,500 Depreciation of special equipment 42,900 20,400 7,200 15,300 Salaries of product-line managers 114,600 40,100 38,900 35,600 Allocated common fixed expenses* 186,400 53,800 81,200 51,400 Total fixed expenses 413,500 122,900 167,800 122,800 Net operating income (loss) $ 39,500 $ 30,100 $ 28,200 $ (18,800) *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 if Racing Difference in Bikes are Net Operating Current Total dropped Income Sales 932000 675000 -257000 Variable manufacturing and sell ing expenses Contribution margin (loss) Fixed expenses: Advertising, traceable Depreciation Salaries of product managers Common allocated costs Total fixed expenses Net Operating Income (loss) Financial Disa dvantage $47,900 479000 326000 153000 453000 349000 -104000 69600 49100 20500 on special equipment 42900 42900 0 79000 35600 114600 186400 186400 413500 357400 56100 39500 -8400 47900 Answer 2, No, Regan Cycle should not drop racing bike. Answer 3 Mountain Bikes Racing Bikes Totals Dirt Bikes Sales 932000 269000 406000 257000 Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: Advertising, traceable Depreciation on special equipment Salaries of product managers Total traceable fixed expenses Product line segment margin Common fixed expenses Net Operating Income (loss) 116000 479000 210000 153000 453000 153000 196000 104000 69600 8600 40500 20500 15300 42900 20400 7200 35600 114600 40100 38900 86600 71400 227100 69100 225900 83900 109400 32600 186400 39500