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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 925,000 $268,000 $ 406,000 $ 251,000 477,000 111,000 208,000 158,000 448,000 157,000 198,000 93,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 69,500 8,500 40,600 20,400 44,400 21,000 7,400 16,000 116,000 40,400 38,600 37,000 185,000 53,600 81,200 50,200 414,900 123,500 167,800 123,600 $ 33,100 $ 33,500 $ 30,200 $(30,600) *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

Answer 1

Financial disadvantage = $ 35,600.

Calculations:

	Racing Bkes
Sales	$   251,000
Variable manufacturing and selling expenses	$   158,000
Contribution margin	$     93,000
Fixed expenses:
Advertising, traceable	$     20,400
Depreciation of special equipment	$              -
Salaries of product-line managers	$     37,000
Allocated common fixed expenses*	$              -
Total fixed expenses	$     57,400
Net operating income (loss)	$     35,600

Answer 2

No.

Answer 3

	Total	Dirt Bikes	Mountain Bikes	Racing Bkes
Sales	$   925,000	$ 268,000	$            406,000	$     251,000
Variable manufacturing and selling expenses	$   477,000	$ 111,000	$            208,000	$     158,000
Contribution margin	$   448,000	$ 157,000	$            198,000	$       93,000
Tracable Fixed expenses:
Advertising, traceable	$     69,500	$       8,500	$              40,600	$       20,400
Salaries of product-line managers	$   116,000	$     40,400	$              38,600	$       37,000
Net benefit	$   262,500	$ 108,100	$           118,800	$       35,600
Depreciation of special equipment	$     44,400	$     21,000	$                7,400	$       16,000
Product line segment margin	$   218,100	$    87,100	$           111,400	$       19,600
Common expenses	$   185,000
Net operating income (loss)	$     33,100

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