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 $ 937,000 $269,000 $ 408,000 $ 260,000 457,000 115,000 191,000 151,000 480,000 154,000 217,000 109,000 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) 70,000 8,300 41,000 20,700 43,900 21,000 7,500 15,400 114,900 40,300 38,700 35,900 187,400 53,800 81,600 52,000 416,200 123,400 168,800 124,000 $ 63,800 $ 30,600 $ 48,200 $(15,000) *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.

\Need help with the last requirement. I have it partially completed. Thanks!

Answer 1

| Calculation of Financial Advantage (Disadvantage) Decrease in Contribution Margin 109000 Decreasein Expenses: Advertisement Tracable 20700 Salaries of Product Manager 35900 Total Decrease in Expenses 56600 Decrease in Net operating income: -52400 Finanical Disadvantge Financial Advantage Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ($52,400) should the Product and sales of racing Bikes be discontinues ? Answer: No Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 937000 2690001 408000 260000 Varaible Expenses 115000 191000 1 51000 Contribution Marrgin (loss) 480000 1540001 217000 109000 Fixed Cost Advertisement Tracable 700001 83001 410001 20700 Depreciation on Special Equipment 43900 21000 75001 15400 Salaries of Product Manager 1149001 403001 38700 35900 Total Traceable Fixed Expenses 228800 69600 872001 72000 Product line Segment Margin (loss) 251200 84400 129800 37000 common Fixed cost 187400 Net Operating Income (Loss) 63800