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.

Reference links

Total Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 925,000 $ 266,000 $ 404,000 $ 255,000 Variable manufacturing and selling expenses 479,000 117,000 207,000 155,000 Contribution margin 446,000 149,000 197,000 100,000 Fixed expenses: Advertising, traceable 69,200 8,400 40,200 20,600 Depreciation of special equipment 43,600 20,700 7,400 15,500 Salaries of product-line managers 115,200 40,400 38,600 36,200 Allocated common fixed expenses* 185,000 53,200 80,800 51,000 Total fixed expenses 413,000 122,700 167,000 123,300 Net operating income (loss) $ 33,000 $ 26,300 $ 30,000 $ (23,300)

Explanation / Answer

1 Total Total without Racing Bikes Difference Sales 925000 670000 -255000 Variable manufacturing and selling expenses    479000 324000 155000 Contribution margin 446000 346000 -100000 Fixed expenses: Advertising, traceable 69200 48600 20600 Depreciation of special equipment 43600 43600 0 Salaries of product-line managers 115200 79000 36200 Allocated common fixed expenses 185000 185000 0 Total fixed expenses 413000 356200 56800 Net operating income (loss) 33000 -10200 -43200 2 No, production and sale of racing bikes should not be discontinued 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 925000 266000 404000 255000 Variable manufacturing and selling expenses    479000 117000 207000 155000 Contribution margin 446000 149000 197000 100000 Traceable Fixed expenses: Advertising, traceable 69200 8400 40200 20600 Depreciation of special equipment 43600 20700 7400 15500 Salaries of product-line managers 115200 40400 38600 36200 Total Traceable Fixed expenses 228000 69500 86200 72300 Segment margin 218000 79500 110800 27700 Allocated common fixed expenses 185000 Net operating income (loss) 33000

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