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The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a...

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.

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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.
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