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. 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.

Total Dirt
Bikes Mountain Bikes Racing
Bikes Sales $ 922,000 $ 267,000 $ 401,000 $ 254,000 Variable manufacturing and selling expenses 463,000 116,000 194,000 153,000 Contribution margin 459,000 151,000 207,000 101,000 Fixed expenses: Advertising, traceable 69,900 8,600 40,800 20,500 Depreciation of special equipment 43,900 20,400 7,900 15,600 Salaries of product-line managers 115,400 40,400 39,000 36,000 Allocated common fixed expenses* 184,400 53,400 80,200 50,800 Total fixed expenses 413,600 122,800 167,900 122,900 Net operating income (loss) $ 45,400 $ 28,200 $ 39,100 $ (21,900)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 922000 668000 -254000 Variable manufacturing and selling expenses 463000 310000 153000 Contribution margin (loss) 459000 358000 -101000 Fixed expenses: Advertising, traceable 69900 49400 20500 Depreciation on special equipment 43900 43900 0 Salaries of product manager 115400 79400 36000 Common allocated costs 184400 184400 0 Total fixed expenses 413600 357100 56500 Net operating income (loss) 45400 900 -44500 Financial (disadvantage) ($44500) 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 922000 267000 401000 254000 Variable manufacturing and selling expenses 463000 116000 194000 153000 Contribution margin (loss) 459000 151000 207000 101000 Traceable fixed expenses: Advertising, traceable 69900 8600 40800 20500 Depreciation on special equipment 43900 20400 7900 15600 Salaries of product manager 115400 40400 39000 36000 Total traceable fixed expenses 229200 69400 87700 72100 Product line segment margin 229800 81600 119300 28900 Common fixed expenses 184400 Net operating income (loss) 45400

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