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 $ 922,000 $ 266,000 $ 404,000 $ 252,000 Variable manufacturing and selling expenses 475,000 114,000 208,000 153,000 Contribution margin 447,000 152,000 196,000 99,000 Fixed expenses: Advertising, traceable 70,100 8,300 40,900 20,900 Depreciation of special equipment 43,400 20,300 7,500 15,600 Salaries of product-line managers 114,500 41,000 38,500 35,000 Allocated common fixed expenses* 184,400 53,200 80,800 50,400 Total fixed expenses 412,400 122,800 167,700 121,900 Net operating income (loss) $ 34,600 $ 29,200 $ 28,300 $ (22,900)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 922000 670000 -252000 Variable manufacturing and selling expenses 475000 322000 153000 Contribution margin (loss) 447000 348000 -99000 Fixed expenses: Advertising, traceable 70100 49200 20900 Depreciation on special equipment 43400 43400 0 Salaries of product manager 114500 79500 35000 Common allocated costs 184400 184400 0 Total fixed expenses 412400 356500 55900 Net operating income (loss) 34600 -8500 -43100 Financial (disadvantage) ($43100) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 922000 266000 404000 252000 Variable manufacturing and selling expenses 475000 114000 208000 153000 Contribution margin (loss) 447000 152000 196000 99000 Traceable fixed expenses: Advertising, traceable 70100 8300 40900 20900 Depreciation on special equipment 43400 20300 7500 15600 Salaries of product manager 114500 41000 38500 35000 Total traceable fixed expenses 228000 69600 86900 71500 Product line segment margin 219000 82400 109100 27500 Common fixed expenses 184400 Net operating income (loss) 34600

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