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 TotalBikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses s 922,8ee $265,808 485,808 252,808 471,80e 115,88 28,ee8 156,808 96,888 451,868 15e,8e8 285,868 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 48,888 69,188 43,188 2,388 28,188 7,308 15, 588 36,888 50,488 8,288 38,68 116,808 4,688 184,488 53,808 412,688 122,188 81,800 Total fixed expenses Net operating income (loss) $ 38,488 27,937,308 $(26,8ee) 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. Requlrec 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 922000 670000 -252000 Variable manufacturing and selling expenses 471000 315000 156000 Contribution margin (loss) 451000 355000 -96000 Fixed expenses: Advertising, traceable 69100 49000 20100 Depreciation on special equipment 43100 43100 0 Salaries of product manager 116000 79200 36800 Common allocated costs 184400 183800 600 Total fixed expenses 412600 355100 57500 Net operating income (loss) 38400 -100 -38500 Financial (disadvantage) ($38500) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 922000 265000 405000 252000 Variable manufacturing and selling expenses 471000 115000 200000 156000 Contribution margin (loss) 451000 150000 205000 96000 Traceable fixed expenses: Advertising, traceable 69100 8200 40800 20100 Depreciation on special equipment 43100 20300 7300 15500 Salaries of product manager 116000 40600 38600 36800 Total traceable fixed expenses 228200 69100 86700 72400 Product line segment margin 222800 80900 118300 23600 Common fixed expenses 184400 Net operating income (loss) 38400

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