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 $ 266,000 $ 407,000 $ 252,000 Variable manufacturing and selling expenses 465,000 112,000 201,000 152,000 Contribution margin 460,000 154,000 206,000 100,000 Fixed expenses: Advertising, traceable 69,900 8,900 40,400 20,600 Depreciation of special equipment 44,400 20,600 7,800 16,000 Salaries of product-line managers 115,400 41,000 38,500 35,900 Allocated common fixed expenses* 185,000 53,200 81,400 50,400 Total fixed expenses 414,700 123,700 168,100 122,900 Net operating income (loss) $ 45,300 $ 30,300 $ 37,900 $ (22,900)

Explanation / Answer

1 Current Total Total IfRacing BikesAre Dropped Difference: NetOperating income Sales 925000 673000 -252000 Variable manufacturing and selling expenses 465000 313000 152000 Contribution margin (loss) 460000 360000 -100000 Fixed expenses: Advertising, traceable 69900 49300 20600 Depreciation on special equipment 44400 44400 0 Salaries of product managers 115400 79500 35900 Common allocated costs 185000 185000 0 Total fixed expenses 414700 358200 56500 Net operating income (loss) 45300 1800 -43500 2 No 3 Total Dirt Bikes Mountain Bikes Racing Bikes Sales 925000 266000 407000 252000 Variable manufacturing and selling expenses 465000 112000 201000 152000 Contribution margin (loss) 460000 154000 206000 100000 Traceable fixed expenses: Advertising, traceable 69900 8900 40400 20600 Depreciation on special equipment 44400 20600 7800 16000 Salaries of product managers 115400 41000 38500 35900 Total traceable fixed expenses 229700 70500 86700 72500 Product line segment margin 230300 83500 119300 27500 Common fixed expenses 185000 Net operating income (loss) 45300

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