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	$931,000	$268,000	$    408,000	$ 255,000
Variable manufacturing and selling expenses	475,000	117,000	202,000	156,000
Contribution margin	456,000	151,000	206,000	99,000
Fixed expenses:
Advertising, traceable	69,400	8,600	40,200	20,600
Depreciation of special equipment	43,900	20,100	7,800	16,000
Salaries of product-line managers	115,400	40,700	38,900	35,800
Allocated common fixed expenses*	186,200	53,600	81,600	51,000
Total fixed expenses	414,900	123,000	168,500	123,400
Net operating income (loss)	41,100	28,000	37,500	-24,400

*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.

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

Calculation of Financial Advantage ( Disadvantage ) Decrease in Contribution Margin 99000 Decreasein Expenses: Advertisement Tracable 20600 Salaries of Product Manager 35800 Total Decrease in Expenses 56400 Decrease in Net operating income: -42600 Finanical Disadvantge Financial Advantage ( Disadvantage) of Drop the Racing Bikes Financial Disadvantage : ( $42,600) should the Product and sales of racing Bikes be discontinues ? Answer: No

Segmented Income Statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales 931000 268000 408000 255000 Varaible Expenses 475000 117000 202000 156000 Contribution Marrgin (loss) 456000 151000 206000 99000 Fixed Cost Advertisement Tracable 69400 8600 40200 206001 Depreciation on Special Equipment 43900 20100 7800 16000 Salaries of Product Manager 115400 40700 38900 35800 Total Traceable Fixed Expenses 228700 69400 86900 72400 Product line Segment Margin (loss) | 227300 81600 119100 26600 common Fixed cost 186200 Net Operating Income (Loss) 41100