Question

Exercise 12-2 Dropping or Retaining a Segment (LO12-2] 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: Dirt Mountain Racing Total Bikes Bikes Bikes $926,000 $265,000 $407,000 $ 254,000 477,000 115,000 208,000 154,000 449,000 150,000 199,000 100.000 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) 69,500 B, 800 40,200 20,500 43,500 20,100 7,400 16,000 114,100 40,100 38,800 35.200 185,200 53,000 81,400 50,800 412,300 122,000 167,800 122,500 $ 36,700 $ 28,000 $ 31,200 $ (22,500) *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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 1 Required 2 >

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	926000	672000	-254000
Variable manufacturing and selling expenses	477000	323000	154000
Contribution margin (loss)	449000	349000	-100000
Fixed expenses:
Advertising, traceable	69500	49000	20500
Depreciation on special equipment	43500	43500	0
Salaries of product manager	114100	78900	35200
Common allocated costs	185200	185200	0
Total fixed expenses	412300	356600	55700
Net operating income (loss)	36700	-7600	-44300
Financial (disadvantage) $(44300)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	926000	265000	407000	254000
Variable manufacturing and selling expenses	477000	115000	208000	154000
Contribution margin (loss)	449000	150000	199000	100000
Traceable fixed expenses:
Advertising, traceable	69500	8800	40200	20500
Depreciation on special equipment	43500	20100	7400	16000
Salaries of product manager	114100	40100	38800	35200
Total traceable fixed expenses	227100	69000	86400	71700
Product line segment margin	221900	81000	112600	28300
Common fixed expenses	185200
Net operating income (loss)	36700