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			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	925,000		$	266,000		$	406,000		$	253,000
Variable manufacturing and selling expenses		468,000			113,000			203,000			152,000
Contribution margin		457,000			153,000			203,000			101,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,300			20,800
Depreciation of special equipment		43,500			20,600			7,400			15,500
Salaries of product-line managers		116,100			40,300			38,800			37,000
Allocated common fixed expenses*		185,000			53,200			81,200			50,600
Total fixed expenses		414,200			122,600			167,700			123,900
Net operating income (loss)	$	42,800		$	30,400		$	35,300		$	(22,900)

*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

1 ( a) - Impact on NOI
	Current Total	Total if Racing Bikes are dropped	Difference
Sales	925000	672000	-253000
Less:- variable costs	468000	316000	152000
Contribution margin	457000	356000	-101000
Fixed expenses :
Advertising	69600	48800	20800
Depreciation	43500	43500	0
Salaries	116100	79100	37000
Allocated FC	185000	185000	0
Total Fixed expenses	414200	356400	57800
NOI	42800	-400	-43200
1 ( b) - No , the production and sale of racing bikes should not be dicontinued
as it will result in decrease of NOI by $ 43200.
2 ( a ) - Segmented Income Statement
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	266000	406000	253000
Less:- variable costs	468000	113000	203000	152000
Contribution margin	457000	153000	203000	101000
Traceable Fixed expenses :-
Advertising	69600	8500	40300	20800
Depreciation	43500	20600	7400	15500
Salaries	116100	40300	38800	37000
Total Traceable FC	229200	69400	86500	73300
SEGMENT MARGIN	227800	83600	116500	27700
Allocated FC	185000
NOI	42800
Part 2- b- Yes, segmented Income statement format would be more useful
to management in assessing the long run financial viability of the various
services as the revenue generated by each service and cost incurred by each service
can easily be identified.