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:

Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 932,000 $ 270,000 $ 408,000 $ 254,000 Variable manufacturing and selling expenses 467,000 119,000 194,000 154,000 Contribution margin 465,000 151,000 214,000 100,000 Fixed expenses: Advertising, traceable 69,500 8,500 40,300 20,700 Depreciation of special equipment 43,600 20,300 7,500 15,800 Salaries of product-line managers 116,500 40,900 38,800 36,800 Allocated common fixed expenses* 186,400 54,000 81,600 50,800 Total fixed expenses 416,000 123,700 168,200 124,100 Net operating income (loss) $ 49,000 $ 27,300 $ 45,800 $ (24,100) *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

Financial advantage / (disadvantage) of discontinuing the racing bikes:

Since there is net financial diadvantage of discontinuing production & sale of racing bikes, it is advisable to continue the Racing Bikes Division.

Segmented Income Statement:

Loss of Contribution Margin       1,00,000 Savings: Advertsing Expense          20,700 Salaries of Prodct Line Managers          36,800 Net Financial Disadvantage         (42,500)

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