Differential Analysis The Key to Decision Making EXERCISE 12

Differential Analysis: The Key to Decision Making EXERCISE 12-2 Dropping or Retaining a Segment LO12-2 The a raci Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and ing bike. Data on sales and expenses for the past quarter follow: Dirt Mountain Racing Total Bikes Bikes Bikes $300,000 $90,000 $150,000 $60,000 Variable manufacturing and selling expenses Contribution margin ..1 Fixed expenses 120000 27.00060,000 3,00 27,000 60,000 180.000 63,000 90,000 27.000 30,000 10,000 14,000 6,000 23,000 6,000 9,000 8,000 35,000 12.000 13,000 10,000 60,000 18,000 30,000 12,000 66,00036,000 Net operating income (loss).32.000 17.000 24,000 $(9.000 $ 32,000 $17.000 $ 24.000 $ (9.000) Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses Total fixed expenses.... 148,000 46,000 Allocated on the basis of sales dollars. Management is concerned ab out the continued losses shown by the racing bikes and wants a rece tion as to whether or not the line should be discontinued. The special equipment used to hat is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? racing bikes has no resale value and does not wear out. Required production and sale of racing bikes be discontinued? statement 3 mented income statement that would be more useful to man- repare a properly formatted agement in assessing the ong-run profitability of the various product lines pro se in heavy equipment. The company fthe carhuretors. An

Solution

If any doubt please comment

ans 1	Total	Total if racing bike is dropped (add dirt bike+mountain bike amt)	Difference: net operating Income In or (dec)
Sales	300000	240,000	-60,000
Variable manufacturing and selling expenses	120000	87,000	33,000
Contribution margin	180000	153,000	-27,000
Fixed expenses:
Advertising, traceable	30000	24,000	6,000
Depreciation of special equipment	23000	23,000	0
Salaries of product-line managers	35000	25,000	10,000
Allocated common fixed expenses*	0	0	0
Total fixed expenses	0	0	16,000
Net operating income (loss)	0	153,000	-11,000
ans 2
No racing bikes should not be dropped
ans 3
Segment Income Statement
	Total	Dirt	Mountain	Racing
		Bikes	Bikes	Bikes
Sales	300,000	90,000	150000	60000
Variable manufacturing and selling expenses	120,000	27,000	60000	33000
Contribution margin	180,000	63,000	90,000	27,000
Traceable Fixed expenses
Advertising, traceable	30,000	10,000	14,000	6,000
Depreciation of special equipment	23,000	6,000	9,000	8000
Salaries of product-line managers	35,000	12,000	13,000	10000
Total Traceable Fixed expenses	88,000	28,000	36,000	24,000
Prduct Line segment Margin	92,000	35,000	54,000	3,000
Common fixed expenses	60000
Net Operating Income	32,000