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 Bikes Mountain Racing Bikes Total Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: $ 933,000 $269,000 404,000 $ 260,000 465,000 118,000 191,000 156,000 213,000 104,000 468,000 151,900 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 68,900 43,900 20,200 15,500 36,900 52,800 124,600 $ 53,000 $ 28,000 $45,600 $(20,600) 8,300 20,800 115,600 40,100 186,60053,80e 415,000 123,000 40,400 7,600 38,600 80,800 167,480 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-run profitability of the various product lines

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 933000 673000 -260000 Variable manufacturing and selling expenses 465000 309000 156000 Contribution margin (loss) 468000 364000 -104000 Fixed expenses: Advertising, traceable 68900 48700 20200 Depreciation on special equipment 43900 43900 0 Salaries of product manager 115600 78700 36900 Common allocated costs 186600 186600 0 Total fixed expenses 415000 357900 57100 Net operating income (loss) 53000 6100 -46900 Financial(disadvantage) ($46900) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 933000 269000 404000 260000 Variable manufacturing and selling expenses 465000 118000 191000 156000 Contribution margin (loss) 468000 151000 213000 104000 Traceable fixed expenses: Advertising, traceable 68900 8300 40400 20200 Depreciation on special equipment 43900 20800 7600 15500 Salaries of product manager 115600 40100 38600 36900 Total traceable fixed expenses 228400 69200 86600 72600 Product line segment margin 239600 81800 126400 31400 Common fixed expenses 186600 Net operating income (loss) 53000

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