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 $ 921,000 $ 266,000 $ 401,000 $ 254,000 Variable manufacturing and selling expenses 485,000 116,000 209,000 160,000 Contribution margin 436,000 150,000 192,000 94,000 Fixed expenses: Advertising, traceable 69,900 8,900 40,600 20,400 Depreciation of special equipment 43,800 20,200 7,600 16,000 Salaries of product-line managers 114,900 40,700 38,800 35,400 Allocated common fixed expenses* 184,200 53,200 80,200 50,800 Total fixed expenses 412,800 123,000 167,200 122,600 Net operating income (loss) $ 23,200 $ 27,000 $ 24,800 $ (28,600)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 921000 667000 -254000 Variable manufacturing and selling expenses 485000 325000 160000 Contribution margin (loss) 436000 342000 -94000 Fixed expenses: Advertising, traceable 69900 49500 20400 Depreciation on special equipment 43800 43800 0 Salaries of product manager 114900 79500 35400 Common allocated costs 184200 184200 0 Total fixed expenses 412800 357000 55800 Net operating income (loss) 23200 -15000 -38200 Financial (disadvantage) ($38200) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 921000 266000 401000 254000 Variable manufacturing and selling expenses 485000 116000 209000 160000 Contribution margin (loss) 436000 150000 192000 94000 Traceable fixed expenses: Advertising, traceable 69900 8900 40600 20400 Depreciation on special equipment 43800 20200 7600 16000 Salaries of product manager 114900 40700 38800 35400 Total traceable fixed expenses 228600 69800 87000 71800 Product line segment margin 207400 80200 105000 22200 Common fixed expenses 184200 Net operating income (loss) 23200

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