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	$	918,000		$	261,000		$	404,000		$	253,000
Variable manufacturing and selling expenses		462,000			114,000			196,000			152,000
Contribution margin		456,000			147,000			208,000			101,000
Fixed expenses:
Advertising, traceable		69,500			8,600			40,800			20,100
Depreciation of special equipment		44,000			20,200			7,800			16,000
Salaries of product-line managers		116,100			40,300			39,000			36,800
Allocated common fixed expenses*		183,600			52,200			80,800			50,600
Total fixed expenses		413,200			121,300			168,400			123,500
Net operating income (loss)	$	42,800		$	25,700		$	39,600		$	(22,500)

*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
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	918000	665000	-253000
Variable manufacturing and selling expenses	462000	310000	152000
Contribution margin (loss)	456000	355000	-101000
Fixed expenses:
Advertising, traceable	69500	49400	20100
Depreciation on special equipment	44000	44000	0
Salaries of product manager	116100	79300	36800
Common allocated costs	183600	183600	0
Total fixed expenses	413200	356300	56900
Net operating income (loss)	42800	-1300	-44100
Financial (disadvantage) $(44100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	918000	261000	404000	253000
Variable manufacturing and selling expenses	462000	114000	196000	152000
Contribution margin (loss)	456000	147000	208000	101000
Traceable fixed expenses:
Advertising, traceable	69500	8600	40800	20100
Depreciation on special equipment	44000	20200	7800	16000
Salaries of product manager	116100	40300	39000	36800
Total traceable fixed expenses	229600	69100	87600	72900
Product line segment margin	226400	77900	120400	28100
Common fixed expenses	183600
Net operating income (loss)	42800