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.

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

2. Should the production and sale of racing bikes be discontinued?

Yes or NO

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 $ 921,000 $ 264,000 $ 405,000 $ 252,000 Variable manufacturing and selling expenses 465,000 117,000 193,000 155,000 Contribution margin 456,000 147,000 212,000 97,000 Fixed expenses: Advertising, traceable 69,700 8,600 40,700 20,400 Depreciation of special equipment 43,700 20,500 7,300 15,900 Salaries of product-line managers 115,300 40,300 38,100 36,900 Allocated common fixed expenses* 184,200 52,800 81,000 50,400 Total fixed expenses 412,900 122,200 167,100 123,600 Net operating income (loss) $ 43,100 $ 24,800 $ 44,900 $ (26,600)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 921000 669000 -252000 Variable manufacturing and selling expenses 465000 310000 155000 Contribution margin (loss) 456000 359000 -97000 Fixed expenses: Advertising, traceable 69700 49300 20400 Depreciation on special equipment 43700 43700 0 Salaries of product manager 115300 78400 36900 Common allocated costs 184200 184200 0 Total fixed expenses 412900 355600 57300 Net operating income (loss) 43100 3400 -39700 Financial (disadvantage) ($39700) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 921000 264000 405000 252000 Variable manufacturing and selling expenses 465000 117000 193000 155000 Contribution margin (loss) 456000 147000 212000 97000 Traceable fixed expenses: Advertising, traceable 69700 8600 40700 20400 Depreciation on special equipment 43700 20500 7300 15900 Salaries of product manager 115300 40300 38100 36900 Total traceable fixed expenses 228700 69400 86100 73200 Product line segment margin 227300 77600 125900 23800 Common fixed expenses 184200 Net operating income (loss) 43100

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