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		$	263,000		$	404,000		$	251,000
Variable manufacturing and selling expenses		463,000			112,000			192,000			159,000
Contribution margin		455,000			151,000			212,000			92,000
Fixed expenses:
Advertising, traceable		69,300			8,900			40,100			20,300
Depreciation of special equipment		44,700			20,900			7,900			15,900
Salaries of product-line managers		114,800			40,700			38,300			35,800
Allocated common fixed expenses*		183,600			52,600			80,800			50,200
Total fixed expenses		412,400			123,100			167,100			122,200
Net operating income (loss)	$	42,600		$	27,900		$	44,900		$	(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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	918000	667000	-251000
Variable manufacturing and selling expenses	463000	304000	159000
Contribution margin (loss)	455000	363000	-92000
Fixed expenses:
Advertising, traceable	69300	49000	20300
Depreciation on special equipment	44700	44700	0
Salaries of product manager	114800	79000	35800
Common allocated costs	183600	183600	0
Total fixed expenses	412400	356300	56100
Net operating income (loss)	42600	6700	-35900
Financial (disadvantage) $(35900)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	918000	263000	404000	251000
Variable manufacturing and selling expenses	463000	112000	192000	159000
Contribution margin (loss)	455000	151000	212000	92000
Traceable fixed expenses:
Advertising, traceable	69300	8900	40100	20300
Depreciation on special equipment	44700	20900	7900	15900
Salaries of product manager	114800	40700	38300	35800
Total traceable fixed expenses	228800	70500	86300	72000
Product line segment margin	226200	80500	125700	20000
Common fixed expenses	183600
Net operating income (loss)	42600