The Regal Cycle Company manufactures three types of bicycles

The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing expenses for the past quarter follow rtMounta Raci Bikes Bikes Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: 921,000 $264,ee8 $ 484,00e 253,e00 463,009 458,000 152,000 211,000 112,eee 5,800 Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses 7e,1e0 8,30 48,98e 20,98 43,200 20,1ee 116,3048,80038,98 184,2052,808 7,300 15,800 Total fixed expenses Net operating incone (loss) 36,600 80,80050,600 413,800 122,ee0 167,980 123,988 $ 44, 200 s 38,000 43,18e $ (28,90e) Allocated on the basis of sales dollars is concerned about the c losses shown by the racing bikes and wants a recommendation as to whether or not Management the line should be discontinued. The special equipment used to produce racing bikes has no r on esale 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 a profitability of the various product lines run

Solution

(1). Net operating income will be decreased by $37500

Thus there will be a financial disadvantage of discontinuing racing bike by $37500

Explanation;

Current total

Total if Racing Bike is dropped

Difference

Sales

$921000

$668000

($253000)

Variable manufacturing and selling expenses

$463000

$305000

$158000

Contribution margin

$458000

$363000

($95000)

Fixed expenses;

Advertising, traceable

$70100

$49200

$20900

Depreciation on special equipment

$43200

$43200

$0

Salaries of product line managers

$116300

$79700

$36600

Allocated common fixed expenses

$184200

$184200

$0

Total fixed expenses

$413800

$356300

$57500

Net operating income (Loss)

$44200

$6700

($37500)

(2).

Answer is (No)

Production and sale of racing bike should not be discontinued because it will result into a decrease of net operating income by $37500.

(3).

Totals

Dirt Bikes

Mountain Bikes

Racing Bikes

Sales

$921000

$264000

$404000

$253000

Variable manufacturing and selling expenses

$463000

$112000

$193000

$158000

Contribution margin

$458000

$152000

$211000

$95000

Traceable fixed expenses;

Advertising, traceable

$70100

$8300

$40900

$20900

Depreciation on special equipment

$43200

$20100

$7300

$15800

Salaries of product line managers

$116300

$40800

$38900

$36600

Total traceable fixed expenses

$229600

$69200

$87100

$73300

Product line segment margin

$228400

$82800

$123900

$21700

Common fixed expenses

$184200

Net operating income (Loss)

$44200

	Current total	Total if Racing Bike is dropped	Difference
Sales	$921000	$668000	($253000)
Variable manufacturing and selling expenses	$463000	$305000	$158000
Contribution margin	$458000	$363000	($95000)
Fixed expenses;
Advertising, traceable	$70100	$49200	$20900
Depreciation on special equipment	$43200	$43200	$0
Salaries of product line managers	$116300	$79700	$36600
Allocated common fixed expenses	$184200	$184200	$0
Total fixed expenses	$413800	$356300	$57500
Net operating income (Loss)	$44200	$6700	($37500)