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. 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 $ 931,000 $ 264,000 $ 409,000 $ 258,000 Variable manufacturing and selling expenses 466,000 116,000 197,000 153,000 Contribution margin 465,000 148,000 212,000 105,000 Fixed expenses: Advertising, traceable 68,900 8,300 40,500 20,100 Depreciation of special equipment 44,500 20,700 7,800 16,000 Salaries of product-line managers 116,000 40,500 38,800 36,700 Allocated common fixed expenses* 186,200 52,800 81,800 51,600 Total fixed expenses 415,600 122,300 168,900 124,400 Net operating income (loss) $ 49,400 $ 25,700 $ 43,100 $ (19,400) 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. Totals Dirt Bikes Mountain Bikes Racing Bikes 0 0 Contribution margin (loss) Traceable fixed expenses: 0) 0 0 $ Total traceable fixed expenses 3 0) Product line segment margin (loss) 0 S Net operating income (loss) K Required 2 Required 3

Explanation / Answer

total if Difference racing bike Current are 1-a) total dropped Sales 931,000 673000 -258,000 Variable expenses 466,000 313000 153,000 contribution margin (loss) 465,000 360000 -105,000 fixed expenses Advertising,traceable 68,900 48800 20,100 Depreciation on special equipment 44,500 43,200 0 Salaries of product managers 116,000 79300 36,700 common allocated costs 186,400 186,400 0 total fixed expenses 415,800 357700 56,800 Net operating income(loss) 49,200 2300 -48,200 Net financial disadvantage $48,200 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 931,000 264,000 409,000 258,000 variable manufacturing and selling expense 466,000 116,000 197,000 153,000 contribution margin (loss) 465,000 148,000 212,000 105,000 traceable fixed expenses advertising 68,900 8,300 40,500 20,100 depreciation on special equipment 44,500 20,700 7,800 16,000 salaries of the product line managers 116,000 40,500 38,800 36,700 total traceable fixed expenses 229,400 69,500 87,100 72,800 product line segment margin 235,600 78,500 124,900 32,200 common fixed expenses 186,200 net operating income(loss) 49,400 2b) yes

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