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 $ 925,000 $ 267,000 $ 403,000 $ 255,000 Variable manufacturing and selling expenses 478,000 118,000 205,000 155,000 Contribution margin 447,000 149,000 198,000 100,000 Fixed expenses: Advertising, traceable 69,600 8,500 40,600 20,500 Depreciation of special equipment 43,600 20,100 7,700 15,800 Salaries of product-line managers 114,900 40,100 38,600 36,200 Allocated common fixed expenses* 185,000 53,400 80,600 51,000 Total fixed expenses 413,100 122,100 167,500 123,500 Net operating income (loss) $ 33,900 $ 26,900 $ 30,500 $ (23,500)

Explanation / Answer

1 Current Total Total If Racing Bikes Are Dropped Difference: NetOperatingIncome Sales 925000 670000 -255000 Variable manufacturing and selling expenses 478000 323000 155000 Contribution margin (loss) 447000 347000 -100000 Fixed expenses: Advertising, traceable 69600 49100 20500 Depreciation on special equipment 43600 43600 0 Salaries of product manager 114900 78700 36200 Common allocated costs 185000 185000 0 Total fixed expenses 413100 356400 56700 Net operating income (loss) 33900 -9400 -43300 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 925000 267000 403000 255000 Variable manufacturing and selling expenses 478000 118000 205000 155000 Contribution margin (loss) 447000 149000 198000 100000 Traceable fixed expenses: Advertising, traceable 69600 8500 40600 20500 Depreciation on special equipment 43600 20100 7700 15800 Salaries of product manager 114900 40100 38600 36200 Total traceable fixed expenses 228100 68700 86900 72500 Product line segment margin 218900 80300 111100 27500 Common fixed expenses 185000 Net operating income (loss) 33900

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