Exercise 12-2 Dropping or Retaining a Segment [LO12-2]
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 $ 930,000 $ 263,000 $ 407,000 $ 260,000 Variable manufacturing and selling expenses 463,000 118,000 193,000 152,000 Contribution margin 467,000 145,000 214,000 108,000 Fixed expenses: Advertising, traceable 70,400 8,800 41,000 20,600 Depreciation of special equipment 43,800 20,900 7,300 15,600 Salaries of product-line managers 116,100 40,800 38,800 36,500 Allocated common fixed expenses* 186,000 52,600 81,400 52,000 Total fixed expenses 416,300 123,100 168,500 124,700 Net operating income (loss) $ 50,700 $ 21,900 $ 45,500 $ (16,700)
*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.
1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. 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.
Required 1 Required 2 Required 3 Prepare a properly formatted segmented income statement that would be more useful to management in assess run profitability of the various product lines. Totals Dirt Bikes Mountain Bikes Racing Bikes Sales Variable manufacturing and selling expenses Contribution margin (loss) Traceable fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses Product line segment margin (loss) Common fixed expenses Net operating income (loss) < Required 2 Previ1 of 4 !!! Next >