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 $ 928,000 $ 266,000 $ 404,000 $ 258,000 Variable manufacturing and selling expenses 461,000 116,000 192,000 153,000 Contribution margin 467,000 150,000 212,000 105,000 Fixed expenses: Advertising, traceable 69,800 8,300 41,000 20,500 Depreciation of special equipment 43,700 20,700 7,300 15,700 Salaries of product-line managers 115,800 40,800 38,700 36,300 Allocated common fixed expenses* 185,600 53,200 80,800 51,600 Total fixed expenses 414,900 123,000 167,800 124,100 Net operating income (loss) $ 52,100 $ 27,000 $ 44,200 $ (19,100)

Explanation / Answer

total if Difference racing bike Current are 1-a) total dropped Sales 928,000 670000 -258,000 Variable expenses 461,000 308000 153,000 contribution margin (loss) 467,000 362000 -105,000 fixed expenses Advertising,traceable 69,800 49300 20,500 Depreciation on special equipment 43,700 43,700 0 Salaries of product managers 115,800 79500 36,300 common allocated costs 185,600 185,600 0 total fixed expenses 414,900 358100 56,800 Net operating income(loss) 52,100 3900 -48,200 Net financial disadvantage ($48,200) 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 928,000 266,000 404,000 258,000 variable manufacturing and selling expense 461,000 116,000 192,000 153,000 contribution margin (loss) 467,000 150,000 212,000 105,000 traceable fixed expenses advertising 69,800 8,300 41,000 20,500 depreciation on special equipment 43,700 20,700 7,300 15,700 salaries of the product line managers 115,800 40,800 38,700 36,300 total traceable fixed expenses 229,300 69,800 87,000 72,500 product line segment margin 237,700 80,200 125,000 32,500 common fixed expenses 185,600 net operating income(loss) 52,100 2b) yes

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