The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a moun

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:

*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.

Total Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 924,000 $ 264,000 $ 403,000 $ 257,000 Variable manufacturing and selling expenses 475,000 115,000 203,000 157,000 Contribution margin 449,000 149,000 200,000 100,000 Fixed expenses: Advertising, traceable 69,900 8,900 40,600 20,400 Depreciation of special equipment 43,200 20,200 7,500 15,500 Salaries of product-line managers 114,500 40,400 38,700 35,400 Allocated common fixed expenses* 184,800 52,800 80,600 51,400 Total fixed expenses 412,400 122,300 167,400 122,700 Net operating income (loss) $ 36,600 $ 26,700 $ 32,600 $ (22,700)

Explanation / Answer

total if Difference racing bike Current are 1-a) total dropped Sales 924,000 667000 -257,000 Variable expenses 475,000 318000 157,000 contribution margin (loss) 449,000 349000 -100,000 fixed expenses Advertising,traceable 69,900 49500 20,400 Depreciation on special equipment 43,200 43,200 0 Salaries of product managers 114,500 79100 35,400 common allocated costs 184,800 184,800 0 total fixed expenses 412,400 356600 55,800 Net operating income(loss) 36,600 -7600 -44,200 Net financial disadvantage ($44,200) 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 924,000 264,000 403,000 257,000 variable manufacturing and selling expense 475,000 115,000 203,000 157,000 contribution margin (loss) 449,000 149,000 200,000 100,000 traceable fixed expenses advertising 69,900 8,900 40,600 20,400 depreciation on special equipment 43,200 20,200 7,500 15,500 salaries of the product line managers 114,500 40,400 38,700 35,400 total traceable fixed expenses 227,600 69,500 86,800 71,300 product line segment margin 221,400 79,500 113,200 28,700 common fixed expenses 184,800 net operating income(loss) 36,600 2b) yes

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