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: Mountain Racing Dirt Total Bikes Bikes Bikes Sales Variable manufacturing and selling $ 930,000 $266,000 $ 404,000 $ 260,000 454,000 112,000 191,000 151,000 expenses Contribution margin 109,000 154,000 213,000 476,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses 8,400 20,200 40,400 53,200 69,500 43,200 115,400 186,000 414,100 40,400 7,700 20,700 15,300 38,900 80,800 36,100 52,000 124,100 122,200 167,800 $61,900 31,800 $ 45,200 $(15,100) Net operating income (loss) *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

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				930,000	670000	-260,000
	Variable expenses				454,000	303000	151,000
	contribution margin (loss)				476,000	367000	-109,000
	fixed expenses
	Advertising,traceable				69,500	48800	20,700
	Depreciation on special equipment				43,200	43,200	0
	Salaries of product managers				115,400	79300	36,100
	common allocated costs				186,000	186,000	0
	total fixed expenses				414,100	357300	56,800
	Net operating income(loss)				61,900	9700	-52,200
2)	No should not be discontinued
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				930,000	266,000	404,000	260,000
	variable manufacturing and selling expense				454,000	112,000	191,000	151,000
	contribution margin (loss)				476,000	154,000	213,000	109,000
	traceable fixed expenses
	advertising				69,500	8,400	40,400	20,700
	depreciation on special equipment				43,200	20,200	7,700	15,300
	salaries of the product line managers				115,400	40,400	38,900	36,100
	total traceable fixed expenses				228,100	69,000	87,000	72,100
	product line segment margin				247,900	85,000	126,000	36,900
	common fixed expenses				186,000
	net operating income(loss)				61,900