Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2] 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: Racing Dirt Mountain Total Bikes Bikes Bikes Sales $926,000 $269,000 $404,000 $ 253,000 Variable manufacturing and selling 471,000 113,000 205,000 153,000 expenses Contribution margin Fixed expenses: 156,000 199,000 455,000 100,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses 40,100 20,800 69,300 43,700 115,300 185,200 413,500 $ 41,500 32,300 $31,800 $(22,600) 8,400 20,600 40,900 7,300 39,000 80,800 15,800 35,400 50,600 53,800 123,700 167,200 122,600 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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	926000	673000	-253000
Variable manufacturing and selling expenses	471000	318000	153000
Contribution margin (loss)	455000	355000	-100000
Fixed expenses:
Advertising, traceable	69300	48500	20800
Depreciation on special equipment	43700	43700	0
Salaries of product manager	115300	79900	35400
Common allocated costs	185200	185200	0
Total fixed expenses	413500	357300	56200
Net operating income (loss)	41500	-2300	-43800
Financial (disadvantage) per quarter $(43800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	926000	269000	404000	253000
Variable manufacturing and selling expenses	471000	113000	205000	153000
Contribution margin (loss)	455000	156000	199000	100000
Traceable fixed expenses:
Advertising, traceable	69300	8400	40100	20800
Depreciation on special equipment	43700	20600	7300	15800
Salaries of product manager	115300	40900	39000	35400
Total traceable fixed expenses	228300	69900	86400	72000
Product line segment margin	226700	86100	112600	28000
Common fixed expenses	185200
Net operating income (loss)	41500