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 Total Bikes Bikes Bikes $ 932,000 $269,000 $ 405,000 $ 258,000 477,000 117,000 209,000 151,000 455,000 152,000 196,000 107,000 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) 69,200 40,800 20,100 43,100 20,100 7,600 15,400 116,000 40,400 38,800 3 6,800 186,400 53,800 81,000 51,600 414,700 122,600 168,200 123,900 $ 40,300 $ 29,400 $ 27,800 $ (16,900) *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

Part 1

Financial (disadvantage)

$(50100)

	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales	932000	674000	(258000)
Variable manufacturing and selling expenses	477000	326000	151000
Contribution margin (loss)	455000	348000	(107000)
Fixed expenses:
Advertising, traceable	69200	49100	20100
Depreciation on special equipment	43100	43100	0
Salaries of product-line managers	116000	79200	36800
Common allocated costs	186400	186400	0
Total fixed expenses	414700	357800	56900
Net operating income (loss)	40300	(9800)	(50100)

Part 2

No. It should not be discontinued as there is financial disadvantage attached with discontinuation.

Part 3

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	932000	269000	405000	258000
Variable manufacturing and selling expenses	477000	117000	209000	151000
Contribution margin (loss)	455000	152000	196000	107000
Traceable fixed expenses:
Advertising, traceable	69200	8300	40800	20100
Depreciation on special equipment	43100	20100	7600	15400
Salaries of product-line managers	116000	40400	38800	36800
Total traceable fixed expenses	228300	68800	87200	72300
Product line segment margin	226700	83200	108800	34700
Common fixed expenses	186400
Net operating income (loss)	$40300

The income statement including product line segment margin helps the management in taking the appropriate decisions.