Exercise 10-2 Dropping or Retaining a Segment [LO10-2]

The Regal Cycle Company manufactures three types of bicyclesa 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	$	929,000	$	267,000	$	407,000	$	255,000
Variable manufacturing and selling expenses		471,000		112,000		204,000		155,000
Contribution margin		458,000		155,000		203,000		100,000
Fixed expenses:
Advertising, traceable		70,800		9,000		40,900		20,900
Depreciation of special equipment		43,500		20,200		7,900		15,400
Salaries of product-line managers		114,500		40,500		38,200		35,800
Allocated common fixed expenses*		185,800		53,400		81,400		51,000
Total fixed expenses		414,600		123,100		168,400		123,100
Net operating income (loss)	$	43,400	$	31,900	$	34,600	$	(23,100)

*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:

1a.	What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income Increase or (Decrease)
Sales
Variable manufacturing and selling expenses
Contribution margin (loss)	0	0	0
Fixed expenses:
Advertising, traceable
Common allocated costs
Salaries of product managers
Depreciation on special equipment
Total fixed expenses	0	0	0
Net operating income (loss)	$0	$0	$0

1b.	Should production and sale of the racing bikes be discontinued?
	No

2a.	Prepare a segmented income statement.

	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales
Variable manufacturing and selling expenses
Contribution margin (loss)	0	0	0	0
Traceable fixed expenses:
Advertising
Depreciation of special equipment
Salaries of the product line managers
Total traceable fixed expenses	0	0	0	0
Product line segment margin	0	$0	$0	$0
Common fixed expenses
Net operating income (loss)	$0

2b.

Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No