value 1667 points Exercise 102 Dropping or Retaining a Segme

value 16.67 points Exercise 10-2 Dropping or Retaining a Segment [LO10-2] 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 $ 925,000$ 261,000 $ 407,000 $257,000 Variable manufacturing and selling expenses 464,000 114,000 193,000 157,000 TotalBikesBikes Sales Contribution margin 461,000 147,000214,000 100,000 Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 8,800 40,300 20,100 15,200 114,90040,100 38,200 36,600 185,000 52,200 81,400 51,400 69.200 43,20020,600 7,400 Total fixed expenses 412,300 121.700 167,300 123.300 Net operating income (loss) S 48,700 S 25,300 46,700 $ (23,300) 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

Solution

2a) Segmented Income Statement (Amounts in $)

2b) Yes, segmented income statement format will be more usable to management in assesing the long run profitability of the various product lines because it shows product margin of all products seperately.

Particulars	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925,000	261,000	407,000	257,000
Less: Variable manufacturing and selling expenses	(464,000)	(114,000)	(193,000)	(157,000)
Contribution Margin (loss) (A)	461,000	147,000	214,000	100,000
Traceable fixed expenses:
Advertising	69,200	8,800	40,300	20,100
Depreciation of special equipment	43,200	20,600	7,400	15,200
Salaries of product line managers	114,900	40,100	38,200	36,600
Total traceable fixed expenses (B)	227,300	69,500	85,900	71,900
Product line segment margin (A - B)	233,700	77,500	128,100	28,100
Less: Common fixed expenses	185,000
Net Operating Income (loss)	48,700