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: Dirt Mountain Racing Bikes Total Bikes Bikes Sales Variable manufacturing and selling $918,000 $262,000 400,000 256,000 152,000 461,000 116,000 193,000 expenses Contribution margin Fixed expenses: 457,000 146,000 207,000 104,000 40,600 7,900 38,600 80,000 411,600 122,400 167,100 69,400 44,300 20,900 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 20,300 15,500 35,100 51,200 122,100 $45,400 23,600 39,900 $(18,100) 8,500 114,300 40,600 183,600 52,400 Total fixed expenses Net operating income (loss) 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

Racing Bikes
Sale	256,000
Variable cost	(152,000)
Contribution	104,000
Traceable fixed cost
Advertisement	20,300
Deprecaition	15,500
Product line manager salary	35,100
Total	70,900
Profit	33,100
Since common fixed expense are not going to be reduced so if the Racking bikes segment is closed,
The profit will be reduced by 33,100
It is recommended not to discontibue the racing bikes line
Segmented Income statement
	Dirt Bikes	Mountain Bikes	Racing Bikes	Total
Sale	262,000	400,000	256,000	918,000
Variable cost	(116,000)	(193,000)	(152,000)	(461,000)
Contribution	146,000	207,000	104,000	457,000
Traceable fixed cost
Advertisement	8,500	40,600	20,300	69,400
Deprecaition	20,900	7,900	15,500	44,300
Product line manager salary	40,600	38,600	35,100	114,300
Total	70,000	87,100	70,900	228,000
Operating profit	76,000	119,900	33,100	229,000
Common fixed cost				(183,600)
Net Operating Profit				45,400