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	$	926,000		$	261,000		$	409,000		$	256,000
Variable manufacturing and selling expenses		462,000			111,000			198,000			153,000
Contribution margin		464,000			150,000			211,000			103,000
Fixed expenses:
Advertising, traceable		70,200			8,900			40,500			20,800
Depreciation of special equipment		43,800			20,600			7,900			15,300
Salaries of product-line managers		115,400			40,500			38,500			36,400
Allocated common fixed expenses*		185,200			52,200			81,800			51,200
Total fixed expenses		414,600			122,200			168,700			123,700
Net operating income (loss)	$	49,400		$	27,800		$	42,300		$	(20,700)

*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				926,000	670000	-256,000
	Variable expenses				462,000	309000	153,000
	contribution margin (loss)				464,000	361000	-103,000
	fixed expenses
	Advertising,traceable				70,200	49400	20,800
	Depreciation on special equipment				43,800	43,800	0
	Salaries of product managers				115,400	79000	36,400
	common allocated costs				185,200	185,200	0
	total fixed expenses				414,600	357400	57,200
	Net operating income(loss)				49,400	3600	-45,800
2)	no
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				926,000	261,000	409,000	256,000
	variable manufacturing and selling expense				462,000	111,000	198,000	153,000
	contribution margin (loss)				464,000	150,000	211,000	103,000
	traceable fixed expenses
	advertising				70,200	8,900	40,500	20,800
	depreciation on special equipment				43,800	20,600	7,900	15,300
	salaries of the product line managers				115,400	40,500	38,500	36,400
	total traceable fixed expenses				229,400	70,000	86,900	72,500
	product line segment margin				234,600	80,000	124,100	30,500
	common fixed expenses				185,200
	net operating income(loss)				49,400