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 $ 923,000 $ 266,000 $ 405,000 $ 252,000 Variable manufacturing and selling expenses 476,000 118,000 203,000 155,000 Contribution margin 447,000 148,000 202,000 97,000 Fixed expenses: Advertising, traceable 69,800 8,600 41,000 20,200 Depreciation of special equipment 43,800 20,600 7,300 15,900 Salaries of product-line managers 115,900 40,100 38,800 37,000 Allocated common fixed expenses* 184,600 53,200 81,000 50,400 Total fixed expenses 414,100 122,500 168,100 123,500 Net operating income (loss) $ 32,900 $ 25,500 $ 33,900 $ (26,500)

Explanation / Answer

Req 1 Net Financial Advantage/(disadvantage) from Discontinuance of Racing Bikes: Loss of revenue -252000 Saving in Relevant cost: Variable cost 155000 Adverstisement cost 20200 Salaries of Product line manager 37000 Net financial disadvantage -39800 Req 2: No, Segment off Racing Bikes shall not be continued. Req 3. SEGMENT-WISE INCOME STATEMENT TOTAL DIRT BIKES MOUNTAIN RACING AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 923,000 266,000 405,000 252,000 Less: Variable cost 476,000 118,000 203,000 155,000 Contribution margin 447,000 148,000 202,000 97,000 Fixed expense: Advertising 69,800 8,600 41,000 20,200 Depreciation 43,800 20,600 7,300 15,900 salaries of Product line managers 115,900 40,100 38,800 37,000 SEGMENT MARGIN 217,500 78,700 114,900 23,900 Less: Common fixed expense 184,600 Net Operating Income 32,900

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