Question

Exercise 11-2 Dropping or Retaining a Segment [LO11-2] 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 $ 928,000 $ 265,000 $ 409,000 $ 254,000 Variable manufacturing and selling expenses 478,000 120,000 208,000 150,000 Contribution margin 450,000 145,000 201,000 104,000 Fixed expenses: Advertising, traceable 70,200 8,800 40,800 20,600 Depreciation of special equipment 43,500 20,500 7,600 15,400 Salaries of product-line managers 115,000 40,200 38,000 36,800 Allocated common fixed expenses* 185,600 53,000 81,800 50,800 Total fixed expenses 414,300 122,500 168,200 123,600 Net operating income (loss) $ 35,700 $ 22,500 $ 32,800 $ (19,600) *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.

Answer 1

1)	Financial Disadvantage	(46,600)
	Current net operating income	35,700
	Less: Loss of Contribution margin by dropping Racing Bikes segment	(104,000)
	Add: Saving in traceable fixed cost belongs to racing bike segment	57,400	(20600+36800)
	Total income of The Regal Cycle company after dropping racing bike segment	(10,900)
	Financial Disadvantage	(46,600)
2)	No, production and sale of racing bikes should not be discontinued
3)		Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	928,000	265,000	409,000	254,000
	Variable manufacturing and selling Expenses	478,000	120,000	208,000	150,000
	Contribution Margin	450,000	145,000	201,000	104,000
	Traceable Fixed Expenses:
	Advertising, Traceable	70,200	8,800	40,800	20,600
	Depreciation of Special Equipments	43,500	20,500	7,600	15,400
	Saalries of Product Line Workers	115,000	40,200	38,000	36,800
	Total Traceable fixed expense	228,700	69,500	86,400	72,800
	Product Line Segment Margin/(Loss)	221,300	75,500	114,600	31,200
	Common Fixed cost	185,600
	Net Operating Income / (Loss)	35,700