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: Dirt Mountain Racing Bikes Total Bikes Bikes $918,000 $262,000 400,000 256,000 152,000 Sales Variable manufacturing and selling 461,000 116,000 193,000 expenses Contribution margin Fixed expenses: 457,000 146,000 207,000 104,000 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* 40,600 7,900 38,600 80,000 411,600 122,400 167,100 69,400 20,300 15,500 35,100 51,200 122,100 $45,400 23,600 39,900 $(18,100) 8,500 44,300 20,900 114,300 40,600 52,400 183,600 Total fixed expenses Net operating income (loss) 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

Financial disadvantage of discontinuing the Racing bikes: Loss of Sales revenue -256000 Less: Saving in Relevant cost Variable cost 152000 Advertisement 20300 Salary of product line manager 35100 Net disadvantage of discontinuance -48600 As there is a financial disadvantage as seen above, the Racing bike segment should not be discontinued SEGMENT-WISE INCOME STATEMENT TOTAL DIRT BIKES MOUNTAIN RACING AMOUNT $ AMOUNT $ AMOUNT $ AMOUNT $ Sales Revenue 918,000 262,000 400,000 256,000 Less: Variable cost 461,000 116,000 193,000 152,000 Contribution margin 457,000 146,000 207,000 104,000 Less: Fixed cost Advertisement 69,400 8,500 40,600 20,300 Depreciation 44,300 20,900 7,900 15,500 salary of product line manager 114,300 40,600 38,600 35,100 SEGMENT MARGIN 229,000 76,000 119,900 33,100 Less: Common fixed expense 183,600 Net Operating Income 45,400

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