Question

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	$	924,000		$	266,000		$	401,000		$	257,000
Variable manufacturing and selling expenses		465,000			112,000			196,000			157,000
Contribution margin		459,000			154,000			205,000			100,000
Fixed expenses:
Advertising, traceable		69,400			8,400			40,800			20,200
Depreciation of special equipment		44,100			20,400			7,900			15,800
Salaries of product-line managers		114,600			40,700			38,200			35,700
Allocated common fixed expenses*		184,800			53,200			80,200			51,400
Total fixed expenses		412,900			122,700			167,100			123,100
Net operating income (loss)	$	46,100		$	31,300		$	37,900		$	(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:

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? Y or N

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.

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

Answer 1