Question

Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2] The Regal Cycle Company manufactures three types...

Exercise 6-2 (Algo) Dropping or Retaining a Segment [LO6-2]

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:

Total Dirt
Bikes
Mountain Bikes Racing
Bikes
Sales $ 926,000 $ 265,000 $ 405,000 $ 256,000
Variable manufacturing and selling expenses 465,000 113,000 201,000 151,000
Contribution margin 461,000 152,000 204,000 105,000
Fixed expenses:
Advertising, traceable 70,200 8,600 40,800 20,800
Depreciation of special equipment 43,700 20,700 7,100 15,900
Salaries of product-line managers 114,000 40,600 38,100 35,300
Allocated common fixed expenses* 185,200 53,000 81,000 51,200
Total fixed expenses 413,100 122,900 167,000 123,200
Net operating income (loss) $ 47,900 $ 29,100 $ 37,000 $ (18,200)

*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.

What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?

Financial (disadvantage) per quarter

?

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.

Totals Dirt Bikes Mountain Bikes Racing Bikes
Contribution margin (loss) 0 0 0 0
Traceable fixed expenses:
Total traceable fixed expenses 0 0 0 0
Product line segment margin (loss) 0 $0 $0 $0
Net operating income (loss) $0

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