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	$	930,000		$	265,000		$	410,000		$	255,000
Variable manufacturing and selling expenses		473,000			111,000			207,000			155,000
Contribution margin		457,000			154,000			203,000			100,000
Fixed expenses:
Advertising, traceable		69,800			8,800			40,700			20,300
Depreciation of special equipment		44,400			20,800			7,700			15,900
Salaries of product-line managers		115,200			40,700			38,800			35,700
Allocated common fixed expenses*		186,000			53,000			82,000			51,000
Total fixed expenses		415,400			123,300			169,200			122,900
Net operating income (loss)	$	41,600		$	30,700		$	33,800		$	(22,900)

*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

1		Current Total	Total if racing bikes are dropped	Difference: Net operating income increase or (decrease)
	Sales	$       9,30,000	$       6,75,000	$     -2,55,000
	Variable manufacturing and selling expenses	$       4,73,000	$       3,18,000	$       1,55,000
	Contribution margin (loss)	$       4,57,000	$       3,57,000	$     -1,00,000
	Fixed expenses:
	Advertising, traceable	$           69,800	$           49,500	$           20,300
	Depreciation on special equipment	$           44,400	$           44,400	$                    -
	Salaries of product managers	$       1,15,200	$           79,500	$           35,700
	Allocated common expense	$       1,86,000	$       1,86,000	$                    -
	Total fixed expenses	$       4,15,400	$       3,59,400	$           56,000
	Net operating income (loss)	$           41,600	$           -2,400	$         -44,000
2	No
	Discontinuation of Production and sale of racing bikes will incur more loss than existing loss from the unit
3		Total	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	$       9,30,000	$       2,65,000	$       4,10,000	$       2,55,000
	Variable manufacturing and selling expenses	$       4,73,000	$       1,11,000	$       2,07,000	$       1,55,000
	Contribution margin (loss)	$       4,57,000	$       1,54,000	$       2,03,000	$       1,00,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,800	$             8,800	$           40,700	$           20,300
	Depreciation on special equipment	$           44,400	$           20,800	$             7,700	$           15,900
	Salaries of product managers	$       1,15,200	$           40,700	$           38,800	$           35,700
	Total traceable fixed expenses	$       2,29,400	$           70,300	$           87,200	$           71,900
	Product line segment margin (loss)	$       2,27,600	$           83,700	$       1,15,800	$           28,100
	Allocated common fixed expense	$       1,86,000
	Net operating income (loss)	$           41,600