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	$	916,000		$	263,000		$	402,000		$	251,000
Variable manufacturing and selling expenses		461,000			116,000			193,000			152,000
Contribution margin		455,000			147,000			209,000			99,000
Fixed expenses:
Advertising, traceable		69,300			8,600			40,400			20,300
Depreciation of special equipment		43,600			20,600			7,300			15,700
Salaries of product-line managers		115,500			40,900			38,500			36,100
Allocated common fixed expenses*		183,200			52,600			80,400			50,200
Total fixed expenses		411,600			122,700			166,600			122,300
Net operating income (loss)	$	43,400		$	24,300		$	42,400		$	(23,300)

*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	916000	665000	-251000
Variable manufacturing and selling expenses	461000	309000	152000
Contribution margin (loss)	455000	356000	-99000
Fixed expenses:
Advertising, traceable	69300	49000	20300
Depreciation on special equipment	43600	43600	0
Salaries of product manager	115500	79400	36100
Common allocated costs	183200	183200	0
Total fixed expenses	411600	355200	56400
Net operating income (loss)	43400	800	-42600
Financial (disadvantage) per quarter (42600)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	916000	263000	402000	251000
Variable manufacturing and selling expenses	461000	116000	193000	152000
Contribution margin (loss)	455000	147000	209000	99000
Traceable fixed expenses:
Advertising, traceable	69300	8600	40400	20300
Depreciation on special equipment	43600	20600	7300	15700
Salaries of product manager	115500	40900	38500	36100
Total traceable fixed expenses	228400	70100	86200	72100
Product line segment margin	226600	76900	122800	26900
Common fixed expenses	183200
Net operating income (loss)	43400