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 Bi 922,800 $263,0ee 407,e0 252,890 152,0e9 Variable manufacturing and selling expenses Contribution margin Fixed expenses: 470,800 113,000 452,800 150,800 202 205,000 282,8188,88 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 8,508 43,688 20,908 114,100 40,400 184,400 52,600 20,880 15,400 35,700 58,400 69,480 40,108 7,300 38,800 81,400 Total fixed expenses Net operating income (loss) 411,500 122,40166,8e122,300 s 40,500 27,600 35,200 $(22,300) 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 922000 670000 -252000 Variable manufacturing and selling expenses 470000 318000 152000 Contribution margin (loss) 452000 352000 -100000 Fixed expenses: Advertising, traceable 69400 48600 20800 Depreciation on special equipment 43600 43600 0 Salaries of product manager 114100 78400 35700 Common allocated costs 184400 184400 0 Total fixed expenses 411500 355000 56500 Net operating income (loss) 40500 -3000 -43500 Financial (disadvantage) ($43500) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 922000 263000 407000 252000 Variable manufacturing and selling expenses 470000 113000 205000 152000 Contribution margin (loss) 452000 150000 202000 100000 Traceable fixed expenses: Advertising, traceable 69400 8500 40100 20800 Depreciation on special equipment 43600 20900 7300 15400 Salaries of product manager 114100 40400 38000 35700 Total traceable fixed expenses 227100 69800 85400 71900 Product line segment margin 224900 80200 116600 28100 Common fixed expenses 184400 Net operating income (loss) 40500

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