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 $ 928,000 $ 270,000 $ 404,000 $ 254,000 Variable manufacturing and selling expenses 469,000 116,000 195,000 158,000 Contribution margin 459,000 154,000 209,000 96,000 Fixed expenses: Advertising, traceable 68,900 8,100 40,600 20,200 Depreciation of special equipment 43,600 20,200 7,700 15,700 Salaries of product-line managers 114,200 40,300 38,700 35,200 Allocated common fixed expenses* 185,600 54,000 80,800 50,800 Total fixed expenses 412,300 122,600 167,800 121,900 Net operating income (loss) $ 46,700 $ 31,400 $ 41,200 $ (25,900) *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

total if Difference racing bike Current are 1-a) total dropped Sales 928,000 674000 -254,000 Variable expenses 469,000 311000 158,000 contribution margin (loss) 459,000 363000 -96,000 fixed expenses Advertising,traceable 68,900 48700 20,200 Depreciation on special equipment 43,600 43,600 0 Salaries of product managers 114,200 79000 35,200 common allocated costs 185,600 185,600 0 total fixed expenses 412,300 356900 55,400 Net operating income(loss) 46,700 6100 -40,600 Net financial disadvantage $40,600 2) No 3) Segmented Income statement Dirt mountain Racing total bikes bikes bikes sales 928,000 270,000 404,000 254,000 variable manufacturing and selling expense 469,000 116,000 195,000 158,000 contribution margin (loss) 459,000 154,000 209,000 96,000 traceable fixed expenses advertising 68,900 8,100 40,600 20,200 depreciation on special equipment 43,600 20,200 7,700 15,700 salaries of the product line managers 114,200 40,300 38,700 35,200 total traceable fixed expenses 226,700 68,600 87,000 71,100 product line segment margin 232,300 85,400 122,000 24,900 common fixed expenses 185,600 net operating income(loss) 46,700

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