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 Bikes Total Bikes Bikes Sales Variable manufacturing and selling $916,000 $262,000 401,000 253,000 479,000 119,000 203,000 157,000 expenseS Contribution margin Fixed expenses: 437,000 143,000 198,000 96,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,700 7,300 38,200 80,200 410,000 121,200 166,400 8,200 43,500 20,400 114,100 40,200 52,400 69,200 20,300 15,800 35,700 50, 600 122,400 31,600 (26, 400) 183,200 Total fixed expenses Net operating income (loss) $ 27,000 21,800 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. 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

1a Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 916000 663000 -253000 Variable manufacturing and selling expenses 479000 322000 157000 Contribution margin (loss) 437000 341000 -96000 Fixed expenses: Advertising, traceable 69200 48900 20300 Depreciation on special equipment 43500 43500 0 Salaries of product manager 114100 78400 35700 Common allocated costs 183200 183200 0 Total fixed expenses 410000 354000 56000 Net operating income (loss) 27000 -13000 -40000 Financial disadvantage ($40000) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 916000 262000 401000 253000 Variable manufacturing and selling expenses 479000 119000 203000 157000 Contribution margin (loss) 437000 143000 198000 96000 Traceable fixed expenses: Advertising, traceable 69200 8200 40700 20300 Depreciation on special equipment 43500 20400 7300 15800 Salaries of product manager 114100 40200 38200 35700 Total traceable fixed expenses 226800 68800 86200 71800 Product line segment margin 210200 74200 111800 24200 Common fixed expenses 183200 Net operating income (loss) 27000

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