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 $930,000 $270,000 $406,000 $ 254,000 483,000 119,000 208,000 156,000 98,000 20100 Sales Variable manufacturing and selling expenses 447,000 151,000 198,000 contribution margin Fixed expenses: 40,900 7,300 114,000 40,000 38,900 8,400 43,700 20,700 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 20,600 15,700 35,100 81,200 50,800 122,200 $ 33,400 $ 27,900 29,700 $ (24,200) 69,900 186,000 54,000 Total fixed expenses 413,600 123,100 168,300 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 930000 676000 -254000 Variable manufacturing and selling expenses 483000 327000 156000 Contribution margin (loss) 447000 349000 -98000 Fixed expenses: Advertising, traceable 69900 49300 20600 Depreciation on special equipment 43700 43700 0 Salaries of product manager 114000 78900 35100 Common allocated costs 186000 186000 0 Total fixed expenses 413600 357900 55700 Net operating income (loss) 33400 -8900 -42300 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 930000 270000 406000 254000 Variable manufacturing and selling expenses 483000 119000 208000 156000 Contribution margin (loss) 447000 151000 198000 98000 Traceable fixed expenses: Advertising, traceable 69900 8400 40900 20600 Depreciation on special equipment 43700 20700 7300 15700 Salaries of product manager 114000 40000 38900 35100 Total traceable fixed expenses 227600 69100 87100 71400 Product line segment margin 219400 81900 110900 26600 Common fixed expenses 186000 Net operating income (loss) 33400

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