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 $ 917,000 $ 262,000 $ 402,000 $ 253,000 Variable manufacturing and selling expenses 474,000 115,000 206,000 153,000 Contribution margin 443,000 147,000 196,000 100,000 Fixed expenses: Advertising, traceable 70,200 8,500 40,900 20,800 Depreciation of special equipment 44,500 20,900 7,900 15,700 Salaries of product-line managers 115,200 40,800 38,200 36,200 Allocated common fixed expenses* 183,400 52,400 80,400 50,600 Total fixed expenses 413,300 122,600 167,400 123,300 Net operating income (loss) $ 29,700 $ 24,400 $ 28,600 $ (23,300)

Explanation / Answer

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 917000 664000 -253000 Variable manufacturing and selling expenses 474000 321000 153000 Contribution margin (loss) 443000 343000 -100000 Fixed expenses: Advertising, traceable 70200 49400 20800 Depreciation on special equipment 44500 44500 0 Salaries of product manager 115200 79000 36200 Common allocated costs 183400 183400 0 Total fixed expenses 413300 356300 57000 Net operating income (loss) 29700 -13300 -43000 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 917000 262000 402000 253000 Variable manufacturing and selling expenses 474000 115000 206000 153000 Contribution margin (loss) 443000 147000 196000 100000 Traceable fixed expenses: Advertising, traceable 70200 8500 40900 20800 Depreciation on special equipment 44500 20900 7900 15700 Salaries of product manager 115200 40800 38200 36200 Total traceable fixed expenses 229900 70200 87000 72700 Product line segment margin 213100 76800 109000 27300 Common fixed expenses 183400 Net operating income (loss) 29700

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