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		$	267,000		$	401,000		$	250,000
Variable manufacturing and selling expenses		478,000			111,000			209,000			158,000
Contribution margin		440,000			156,000			192,000			92,000
Fixed expenses:
Advertising, traceable		69,300			9,000			40,200			20,100
Depreciation of special equipment		44,000			20,300			7,800			15,900
Salaries of product-line managers		115,100			40,600			38,300			36,200
Allocated common fixed expenses*		183,600			53,400			80,200			50,000
Total fixed expenses		412,000			123,300			166,500			122,200
Net operating income (loss)	$	28,000		$	32,700		$	25,500		$	(30,200)

*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