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 $ 926,000 $ 266,000 $ 403,000 $ 257,000 Variable manufacturing and selling expenses 479,000 111,000 208,000 160,000 Contribution margin 447,000 155,000 195,000 97,000 Fixed expenses: Advertising, traceable 69,200 8,200 40,700 20,300 Depreciation of special equipment 43,600 20,600 7,200 15,800 Salaries of product-line managers 115,000 40,200 38,900 35,900 Allocated common fixed expenses* 185,200 53,200 80,600 51,400 Total fixed expenses 413,000 122,200 167,400 123,400 Net operating income (loss) $ 34,000 $ 32,800 $ 27,600 $ (26,400)

Explanation / Answer

Req 1: Financial Advantage/ (Disadvantage) Loss of revenue -257000 Less: savings in cost Variable manufacturig and selling cost 160000 Advertisement expense 20300 Salaries of product line manager 35900 Financial disadvantage of discontinuance -40800 Hence, Racing bike shall not be discontinued SEGMENT-WISE INCOME STATEMENT TOTAL Dirt Bikes Mountain Racing bikes AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 926,000 266,000 403,000 257,000 Less: variable cost 479,000 111,000 208,000 160,000 Conribution margin 447,000 155,000 195,000 97,000 Less: Traceable fixed cost Advertisement expense 69,200 8,200 40,700 20,300 Depreciation 43,600 20,600 7,200 15,800 Salaries of product line manager 115,000 40,200 38,900 35,900 SEGMENT MARGIN 219,200 86,000 108,200 25,000 Less: Common Fixed expense 185,200 Net Operating Income 34,000

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