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: Dirt Mountain Racing 931,000 $270,000 $ 404,000 257,000 Total Bikes Bikes Bikes Sales Variable manufacturing and selling 468,000 111,000 204,000 153,000 expenses Contribution margin Fixed expenses: ? ? 463,000159,000 200,000 104,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 70,200 8,800 40,500 20,900 7.90015,800 36,200 186, 200 54,00080,80051.400 15,900123,600168,000 124,300 47,100 35,400 32,000 $(20, 300) 44,00020,300 1,500 40,500 38,800 Total fixed expenses Net operating income (loss) 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-rurn profitability of the various product lines.

Explanation / Answer

Incremental Analysis TOTAL Discontinue Net Increase/(Decrease) AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 931,000 674,000 -257,000 Less: Variable cost 468,000 315,000 153,000 Contribution margin 463,000 359,000 -104,000 Less: Fixed cost Advertisement 70,200 49,300 20,900 Depreciation 44,000 44,000 0 Salary of product line manager 115,500 79,300 36,200 Common Fixed cost 186,200 186,200 0 SEGMENT MARGIN 47,100 200 -46,900 No, Racing Rike Division Shall not be Discontinued SEGMENT-WISE INCOME STATEMENT TOTAL Dirt Mountain Racing AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 931,000 270,000 404,000 257,000 Less: Variable cost 468,000 111,000 204,000 153,000 Contribution margin 463,000 159,000 200,000 104,000 Less: Traceable Expense Advertisement 70,200 8,800 40,500 20,900 Depreciation 44,000 20,300 7,900 15,800 Salary of product line manager 115,500 40,500 38,800 36,200 Total Traecable expense 229,700 69,600 87,200 72,900 SEGMENT MARGIN 233,300 89,400 112,800 31,100 Less: Common Fixed expesne 186,200 Net Operating Income 47,100

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