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 $ 931,000 $ 267,000 $ 409,000 $ 255,000 Variable manufacturing and selling expenses 468,000 115,000 194,000 159,000 Contribution margin 463,000 152,000 215,000 96,000 Fixed expenses: Advertising, traceable 69,000 8,200 40,300 20,500 Depreciation of special equipment 43,000 20,100 7,200 15,700 Salaries of product-line managers 115,500 40,100 38,500 36,900 Allocated common fixed expenses* 186,200 53,400 81,800 51,000 Total fixed expenses 413,700 121,800 167,800 124,100 Net operating income (loss) $ 49,300 $ 30,200 $ 47,200 $ (28,100) *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

1) What is the financial advantage(disadvantage )per Quarter of discontinuing the Racing Bikes Lost Contribution Margin $ (96,000.00) Saving of fixed expenses Advertising-Traceable $    20,500.00 Salaries of product line manager $    36,900.00 Decrease in net operating income $ (38,600.00) Note: Fixed cost are of two types Traceable A traceable fixed cost is related to existence of a particular segment, if a particular segment is close down the fixed cost would not have been incurred. Common Cost A common cost relates to more than one segment.Common cost cannot be avoided if any segment close down. Depreciation of special equipment is a sunk cost so irrelevant for decision. Sunk cost are those cost which is already incurred. 2) No the production and sale of racing bikes should not be discontinue because it will result operating income of company as a whole would decrease by $38600 3) Properly formatted segmented income statement Total Dirt Bikes Mountain Bikes Racing Bikes Sales $ 931,000.00 $    267,000.00 $       409,000.00 $    255,000.00 Variable Cost $ 468,000.00 $    115,000.00 $       194,000.00 $    159,000.00 Contribution Margin $ 463,000.00 $    152,000.00 $       215,000.00 $      96,000.00 Less: Traceable Fixed Cost Advertising $    69,000.00 $         8,200.00 $         40,300.00 $      20,500.00 Depreciation of special equipment $    43,000.00 $      20,100.00 $            7,200.00 $      15,700.00 Salaries of product line manager $ 115,500.00 $      40,100.00 $         38,500.00 $      36,900.00 Total Traceable fixed expenses $ 227,500.00 $      68,400.00 $         86,000.00 $      73,100.00 Product line segment margin $ 235,500.00 $      83,600.00 $       129,000.00 $      22,900.00 Less: Common fixed expenses $ 186,200.00 Operating Income= $    49,300.00

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