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 $ 932,000 $269,000 $ 409,000 $ 254,000 475,000 115,000 203,000 157,000 457,000 154,000 206,000 97,000 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) 69,600 8,100 40,900 20,600 43,700 20,400 7,300 16,000 115,700 40,400 38,900 36,400 186,400 53,800 81,800 50,800 415,400 122,700 168,900 123,800 $ 41,600 $ 31,300 $ 37,100 $ (26,800) *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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? < Required 1 Required 2 >

Answer 1

						total if	Difference
						racing bike
					Current	are
1-a)					total	dropped
	Sales				932,000	678000	-254,000
	Variable expenses				475,000	318000	157,000
	contribution margin (loss)				457,000	360000	-97,000
	fixed expenses
	Advertising,traceable				69,600	49000	20,600
	Depreciation on special equipment				43,700	43,700	0
	Salaries of product managers				115,700	79300	36,400
	common allocated costs				186,400	186,400	0
	total fixed expenses				415,400	358400	57,000
	Net operating income(loss)				41,600	1600	-40,000
	financial disadvantage			-40,000
2)	No
3)	Segmented Income statement
						Dirt	mountain	Racing
					total	bikes	bikes	bikes
	sales				932,000	269,000	409,000	254,000
	variable manufacturing and selling expense				475,000	115,000	203,000	157,000
	contribution margin (loss)				457,000	154,000	206,000	97,000
	traceable fixed expenses
	advertising				69,600	8,100	40,900	20,600
	depreciation on special equipment				43,700	20,400	7,300	16,000
	salaries of the product line managers				115,700	40,400	38,900	36,400
	total traceable fixed expenses				229,000	68,900	87,100	73,000
	product line segment margin				228,000	85,100	118,900	24,000
	common fixed expenses				186,400
	net operating income(loss)				41,600
2b)	yes