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 $ 921,000 476,000 445,000 Dirt Bikes $263,000 114,000 149,000 Mountain Bikes $ 406,000 205,000 201,000 Racing Bikes $ 252,000 157,000 95.000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses! Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses Net operating income (loss) 69,700 8,500 40,300 20,900 43,900 20.800 7,600 15,500 115,300 40,900 38,800 35,600 184,200 52,600 81,200 50,400 413, 100 122, BOD 167, 900 122,400 $ 31,900 $ 26,200 $ 33,100 $(27,400) "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	$       9,21,000	$       6,69,000	$     -2,52,000
	Variable manufacturing and selling expenses	$       4,76,000	$       3,19,000	$       1,57,000
	Contribution margin (loss)	$       4,45,000	$       3,50,000	$         -95,000
	Fixed expenses:
	Advertising, traceable	$           69,700	$           48,800	$           20,900
	Depreciation on special equipment	$           43,900	$           43,900	$                    -
	Salaries of product managers	$       1,15,300	$           79,700	$           35,600
	Allocated common expense	$       1,84,200	$       1,84,200	$                    -
	Total fixed expenses	$       4,13,100	$       3,56,600	$           56,500
	Net operating income (loss)	$           31,900	$           -6,600	$         -38,500
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	$       9,21,000	$       2,63,000	$       4,06,000	$       2,52,000
	Variable manufacturing and selling expenses	$       4,76,000	$       1,14,000	$       2,05,000	$       1,57,000
	Contribution margin (loss)	$       4,45,000	$       1,49,000	$       2,01,000	$           95,000
	Traceable Fixed expenses:
	Advertising, traceable	$           69,700	$             8,500	$           40,300	$           20,900
	Depreciation on special equipment	$           43,900	$           20,800	$             7,600	$           15,500
	Salaries of product managers	$       1,15,300	$           40,900	$           38,800	$           35,600
	Total traceable fixed expenses	$       2,28,900	$           70,200	$           86,700	$           72,000
	Product line segment margin (loss)	$       2,16,100	$           78,800	$       1,14,300	$           23,000
	Allocated common fixed expense	$       1,84,200
	Net operating income (loss)	$           31,900