Question

Exercise 11-2 Dropping or Retaining a Segment [LO11-2]

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	$	914,000		$	262,000		$	401,000		$	251,000
Variable manufacturing and selling expenses		471,000			115,000			199,000			157,000
Contribution margin		443,000			147,000			202,000			94,000
Fixed expenses:
Advertising, traceable		70,000			8,600			40,500			20,900
Depreciation of special equipment		44,100			20,700			7,700			15,700
Salaries of product-line managers		114,400			40,600			38,400			35,400
Allocated common fixed expenses*		182,800			52,400			80,200			50,200
Total fixed expenses		411,300			122,300			166,800			122,200
Net operating income (loss)	$	31,700		$	24,700		$	35,200		$	(28,200)

*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

What impact on net operating income by discountinuningracing bikes Total IF Racing bikes net Operating Difference in Current total Are Droped income Sales Varaible Expenses Contribution Marrgin Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager Common Allocated Cost Total Fixed Cost Net Operating Income (Loss) 251000 914000 663000 157000 471000 314000 94000 443000 349000 20900 70000 49100 44100 44100 0 114400 79000 35400 182800 182800 355000 56300 411300 31700 -6000 -37700 Financial Advantage ( Disadvantage) of Drop the Racing Bikes Financial Disadvantage Per Quarter : ($37,700) should the Product and sales of racing Bikes be discontinues? Answer No

Segmented Income Statement Dirt Bikes Mountain Bikes Racing Bikes Total Sales 251000 914000 262000 401000 Varaible Expenses Contribution Marrgin (loss) Fixed Cost Advertisement Tracable Depreciation on Special Equipment Salaries of Product Manager Total Traceable Fixed Expenses Product line Segment Margin (loss) 471000 115000 199000 157000 443000 147000 202000 94000 40500 70000 8600 20900 15700 44100 20700 7700 40600 35400 114400 38400 228500 72000 69900 86600 214500 77100 115400 22000 common Fixed cost 182800 Net Operating Income (Loss) 31700