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: $T8s4D4plOrQHAAAAABJRU5ErkJggg==$
*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.

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.

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				926,000	671000	-255,000
	Variable expenses				465,000	309000	156,000
	contribution margin (loss)				461,000	362000	-99,000
	fixed expenses
	Advertising,traceable				69,700	49600	20,100
	Depreciation on special equipment				43,900	43,900	0
	Salaries of product managers				113,500	78200	35,300
	common allocated costs				185,200	185,200	0
	total fixed expenses				412,300	356900	55,400
	Net operating income(loss)				48,700	5100	-43,600
	financial disadvantage			-43600
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				926,000	263,000	408,000	255,000
	variable manufacturing and selling expense				465,000	115,000	194,000	156,000
	contribution margin (loss)				461,000	148,000	214,000	99,000
	traceable fixed expenses
	advertising				69,700	9,000	40,600	20,100
	depreciation on special equipment				43,900	20,800	7,200	15,900
	salaries of the product line managers				113,500	40,100	38,100	35,300
	total traceable fixed expenses				227,100	69,900	85,900	71,300
	product line segment margin				233,900	78,100	128,100	27,700
	common fixed expenses				185,200
	net operating income(loss)				48,700
2b)	yes