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 $ 923,000 $ 262,000 $ 403,000 $ 258,000 Variable manufacturing and selling expenses 463,000 115,000 194,000 154,000 Contribution margin 460,000 147,000 209,000 104,000 Fixed expenses: Advertising, traceable 69,800 8,600 41,000 20,200 Depreciation of special equipment 44,400 20,700 7,800 15,900 Salaries of product-line managers 115,800 41,000 38,300 36,500 Allocated common fixed expenses* 184,600 52,400 80,600 51,600 Total fixed expenses 414,600 122,700 167,700 124,200 Net operating income (loss) $ 45,400 $ 24,300 $ 41,300 $ (20,200)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 923000 665000 -258000 Variable manufacturing and selling expenses 463000 309000 154000 Contribution margin (loss) 460000 356000 -104000 Fixed expenses: Advertising, traceable 69800 49600 20200 Depreciation on special equipment 44400 44400 0 Salaries of product manager 115800 79300 36500 Common allocated costs 184600 184600 0 Total fixed expenses 414600 357900 56700 Net operating income (loss) 45400 -1900 -47300 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 923000 262000 403000 258000 Variable manufacturing and selling expenses 463000 115000 194000 154000 Contribution margin (loss) 460000 147000 209000 104000 Traceable fixed expenses: Advertising, traceable 69800 8600 41000 20200 Depreciation on special equipment 44400 20700 7800 15900 Salaries of product manager 115800 41000 38300 36500 Total traceable fixed expenses 230000 70300 87100 72600 Product line segment margin 230000 76700 121900 31400 Common fixed expenses 184600 Net operating income (loss) 45400

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