Question

(Please show calculations for study purposes)

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	$	937,000		$	269,000		$	409,000		$	259,000
Variable manufacturing and selling expenses		473,000			116,000			203,000			154,000
Contribution margin		464,000			153,000			206,000			105,000
Fixed expenses:
Advertising, traceable		69,200			8,700			40,100			20,400
Depreciation of special equipment		43,300			20,600			7,500			15,200
Salaries of product-line managers		116,200			40,400			38,900			36,900
Allocated common fixed expenses*		187,400			53,800			81,800			51,800
Total fixed expenses		416,100			123,500			168,300			124,300
Net operating income (loss)	$	47,900		$	29,500		$	37,700		$	(19,300)

*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:  Drop or Continue a Product Line Decision

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

Calculation of Financial Advantage ( Disadvantage) Decrease in Contribution Margin 105000 Decreasein Expenses: Advertisement Tracable 20400 Salaries of Product Manager 36900 Total Decrease in Expenses 57300 Decrease in Net operating income: -47700 Finanical Disadvantge | Financial Advantage ( Disadvantage of Drop the Racing Bikes Financial Disadvantage : ( $47,700) should the Product and sales of racing Bikes be discontinues ? Answer: No

Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 937000 269000 409000 259000 Varaible Expenses 473000 116000 203000 154000 Contribution Marrgin (loss) 464000 153000 206000 105000 Fixed Cost Advertisement Tracable 692001 8700 40100 20400 Depreciation on Special Equipment 43300 20600 7500 15200 Salaries of Product Manager 116200 40400 38900 36900 Total Traceable Fixed Expenses 228700 69700 86500 72500 Product line Segment Margin (loss) 235300 83300 1195001 32500 common Fixed cost 187400 Net Operating Income (Loss) 47900