Exercise 12-2 Dropping or Retaining a Segment [LO12-2] The Regal Cycle Company m

Question

Exercise 12-2 Dropping or Retaining a Segment [LO12-2] 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: Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 918,000 $ 262,000 $ 406,000 $ 250,000 Variable manufacturing and selling expenses 461,000 114,000 192,000 155,000 Contribution margin 457,000 148,000 214,000 95,000 Fixed expenses: Advertising, traceable 69,200 8,400 40,700 20,100 Depreciation of special equipment 43,700 20,800 7,500 15,400 Salaries of product-line managers 115,800 40,100 38,900 36,800 Allocated common fixed expenses* 183,600 52,400 81,200 50,000 Total fixed expenses 412,300 121,700 168,300 122,300 Net operating income (loss) $ 44,700 $ 26,300 $ 45,700 $ (27,300) *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.

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 918000 668000 -250000 Variable manufacturing and selling expenses 461000 306000 155000 Contribution margin (loss) 457000 362000 -95000 Fixed expenses: Advertising, traceable 69200 49100 20100 Depreciation on special equipment 43700 43700 0 Salaries of product manager 115800 79000 36800 Common allocated costs 183600 183600 0 Total fixed expenses 412300 355400 56900 Net operating income (loss) 44700 6600 -38100 Fiinancial disadvantage per quarter = $38100 2 No,production and sale of racing bikes shuould not be discontinued 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 918000 262000 406000 250000 Variable manufacturing and selling expenses 461000 114000 192000 155000 Contribution margin (loss) 457000 148000 214000 95000 Traceable fixed expenses: Advertising, traceable 69200 8400 40700 20100 Depreciation on special equipment 43700 20800 7500 15400 Salaries of product manager 115800 40100 38900 36800 Total traceable fixed expenses 228700 69300 87100 72300 Product line segment margin 228300 78700 126900 22700 Common fixed expenses 183600 Net operating income (loss) 44700

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