Question

Exercise 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 $ 928,000 $269,000 $484,800 $ 255,000 480, 680 119.cee 206,00 155,000 448,00 15e,eee 198,eee 100,000 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) 69,000 8,30 40,100 20,600 43,400 20,700 7.10e 15,600 114,30 40,300 38,800 35, 2ee 185,600 53,800 Be, 51,000 412,300 123,100 166,880 122,400 $ 35,700 $ 26,900 $ 31,200 $(22,400) "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. 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? Recuired 2 >

Answer 1

1. Financial (disadvantage) per quarter: $-44200

	Current Total	Total If Racing Bikes Are Dropped	Difference: Financial advantage (disadvantage)
Sales	928000	673000	-255000
Variable manufacturing and selling expenses	480000	325000	155000
Contribution margin (loss)	448000	348000	-100000
Fixed expenses:
Advertising, traceable	69000	48400	20600
Depreciation on special equipment	43400	43400	0
Salaries of product-line managers	114300	79100	35200
Allocated common fixed expenses	185600	185600	0
Total fixed expenses	412300	356500	55800
Net operating income (loss)	35700	-8500	-44200

2. No.

The production and sale of racing bikes should not be discontinued as it will result in a financial disadvantage.

3.

Segmented Income Statement
	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	928000	269000	404000	255000
Variable manufacturing and selling expenses	480000	119000	206000	155000
Contribution margin (loss)	448000	150000	198000	100000
Traceable fixed expenses:
Advertising	69000	8300	40100	20600
Depreciation on special equipment	43400	20700	7100	15600
Salaries of product-line managers	114300	40300	38800	35200
Total traceable fixed expenses	226700	69300	86000	71400
Segment operating income	221300	80700	112000	28600
Common fixed expenses	185600
Net operating income (loss) $	35700