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The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a...

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 $ 922,000 $ 266,000 $ 404,000 $ 252,000
Variable manufacturing and selling expenses 477,000 118,000 200,000 159,000
Contribution margin 445,000 148,000 204,000 93,000
Fixed expenses:
Advertising, traceable 69,500 8,500 40,500 20,500
Depreciation of special equipment 43,300 20,200 7,700 15,400
Salaries of product-line managers 114,800 41,000 38,500 35,300
Allocated common fixed expenses* 184,400 53,200 80,800 50,400
Total fixed expenses 412,000 122,900 167,500 121,600
Net operating income (loss) $ 33,000 $ 25,100 $ 36,500 $ (28,600)

*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.

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Answer #1

1.

Racing Bikes
Sales $(252,000)
Variable manufacturing and selling expense 159,000
Contribution margin (93,000)
Avoidable fixed expenses:
Advertising, traceable 20,500
Salaries of product line managers 35,300
Total avoidable fixed expenses 55,800
Financial advantage (disadvantage) $(37,200)

2.

As per above results production and sale of racing bikes should not be discontinued.

3.

Total Dirt Bike Mountain Bike Racing Bike
Sales $922,000 $266,000 $404,000 $252,000
Less: Variable manufacturing and selling expenses 477,000 118,000 200,000 159,000
Contribution margin 445,000 148,000 204,000 93,000
Less: Traceable fixed expenses:
Advertising, traceable 69,500 8,500 40,500 20,500
Depreciation of special equipment 43,300 20,200 7,700 15,400
Salaries of product line managers 114,800 41,000 38,500 35,300
Total traceable fixed expenses 227,600 69,700 86,700 71,200
Segment margin 217,400 78,300 117,300 21,800
Less: Common fixed expenses 184,400
Net operating income (loss) $33,000
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