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 $ 920,000 $ 265,000 $ 405,000 $ 250,000 Variable manufacturing and selling expenses 472,000 111,000 204,000 157,000 Contribution margin 448,000 154,000 201,000 93,000 Fixed expenses: Advertising, traceable 70,000 8,700 40,400 20,900 Depreciation of special equipment 43,700 20,900 7,600 15,200 Salaries of product-line managers 115,600 40,300 38,600 36,700 Allocated common fixed expenses* 184,000 53,000 81,000 50,000 Total fixed expenses 413,300 122,900 167,600 122,800 Net operating income (loss) $ 34,700 $ 31,100 $ 33,400 $ (29,800)

Explanation / Answer

The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.

1 Current Total Total if Difference Racing Bikes are dropped Sales $ 920,000 $ 670,000 $ 250,000 Variable manufacturing and selling expenses 472,000 315,000 157,000 Contribution margin 448,000 355,000 93,000 Fixed expenses: 0 Advertising, traceable 70,000 49,100 20,900 Depreciation of special equipment 43,700 28,500 15,200 Salaries of product-line managers 115,600 78,900 36,700 Allocated common fixed expenses 184,000 184,000 0 Total fixed expenses 413,300 290,500 122,800 Net operating income (loss) $ 34,700 $ 14,500 $ 20200

The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.

Financial disadvantage 3 Total Dirt Mountain Bikes Racing Bikes Bikes Sales $ 920,000 $ 265,000 $ 405,000 $ 250,000 Variable manufacturing and selling expenses 472,000 111,000 204,000 157,000 Contribution margin 448,000 154,000 201,000 93,000 Traceable Fixed expenses: Advertising, traceable 70,000 8,700 40,400 20,900 Depreciation of special equipment 43,700 20,900 7,600 15,200 Salaries of product-line managers 115,600 40,300 38,600 36,700 Totaltraceable fixed expenses 229,300 69,900 86,600 72,800 Product line segment margin 218,700 84,100 114,400 20,200 common fixed expenses 184,000 Net operating income (loss) $ 34,700

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