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		$	267,000		$	404,000		$	253,000
Variable manufacturing and selling expenses		466,000			111,000			201,000			154,000
Contribution margin		458,000			156,000			203,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,700			40,700			20,700
Depreciation of special equipment		43,500			20,200			7,900			15,400
Salaries of product-line managers		114,400			40,100			38,800			35,500
Allocated common fixed expenses*		184,800			53,400			80,800			50,600
Total fixed expenses		412,800			122,400			168,200			122,200
Net operating income (loss)	$	45,200		$	33,600		$	34,800		$	(23,200)

*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.

Questions

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)

Lost contribution margin		($99,000)
Fixed costs that can be avoided:
Advertising, traceable	$20,700
Salary of the product-line manager	$35,500	$ 56,200
Financial (disadvantage) of discontinuing the Racing Bikes		($42,800)

(2)

No, production and sale of the racing bikes should not be discontinued.

(3)

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$924,000	$267,000	$404,000	$253,000
Variable manufacturing and selling expenses	$466,000	$111,000	$201,000	$154,000
Contribution margin (loss)	$458,000	$156,000	$203,000	$99,000
Traceable fixed expenses:
Advertising, traceable	$70,100	$8,700	$40,700	$20,700
Depreciation of special equipment	$43,500	$20,200	$7,900	$15,400
Salaries of the product line managers	$114,400	$40,100	$38,800	$35,500
Total traceable fixed expenses	$228,000	$69,000	$87,400	$71,600
Product line segment margin (loss)	$230,000	$87,000	$115,600	$27,400
Common fixed expenses	$184,800
Net operating income (loss)	$ 45,200