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 $ 406,000 $ 251,000 Variable manufacturing and selling expenses 464,000 120,000 193,000 151,000 Contribution margin 459,000 146,000 213,000 100,000 Fixed expenses: Advertising, traceable 69,300 8,700 40,400 20,200 Depreciation of special equipment 43,600 20,200 7,600 15,800 Salaries of product-line managers 116,200 40,900 38,900 36,400 Allocated common fixed expenses* 184,600 53,200 81,200 50,200 Total fixed expenses 413,700 123,000 168,100 122,600 Net operating income (loss) $ 45,300 $ 23,000 $ 44,900 $ (22,600)

Explanation / Answer

1) Financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes = Contribution margin of Racing bikes - Avoidable fixed costs of racing bikes Contribution margin of Racing bikes = $100000 Avoidable fixed costs of racing bikes = $20200+15800+36400 = $72400 Financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes = $100000-$72400 = $27600 2) No, because it reduces the overall profit by $27600 3) Total Dirt Bikes Mountain Bikes Racing Bikes Sales 9,23,000 2,66,000 4,06,000 2,51,000 Variable manufacturing and selling expenses 4,64,000 1,20,000 1,93,000 1,51,000 Contribution margin 4,59,000 1,46,000 2,13,000 1,00,000 Traceable Fixed expenses: Advertising, traceable 69,300 8,700 40,400 20,200 Depreciation of special equipment 43,600 20,200 7,600 15,800 Salaries of product-line managers 1,16,200 40,900 38,900 36,400 Total Traceable Fixed expenses 2,29,100 69,800 86,900 72,400 Segment margin 2,29,900 76,200 1,26,100 27,600 Common fixed expenses 1,84,600 1,84,600 Net operating income (loss) 45,300 45,300

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