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	$	925,000		$	265,000		$	408,000		$	252,000
Variable manufacturing and selling expenses		479,000			117,000			209,000			153,000
Contribution margin		446,000			148,000			199,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,700			40,500			20,900
Depreciation of special equipment		44,100			21,000			8,000			15,100
Salaries of product-line managers		114,700			40,100			38,100			36,500
Allocated common fixed expenses*		185,000			53,000			81,600			50,400
Total fixed expenses		413,900			122,800			168,200			122,900
Net operating income (loss)	$	32,100		$	25,200		$	30,800		$	(23,900)

*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	925000	673000	-252000
Variable manufacturing and selling expenses	479000	326000	153000
Contribution margin (loss)	446000	347000	-99000
Fixed expenses:
Advertising, traceable	70100	49200	20900
Depreciation on special equipment	44100	44100	0
Salaries of product manager	114700	78200	36500
Common allocated costs	185000	185000	0
Total fixed expenses	413900	356500	57400
Net operating income (loss)	32100	-9500	-41600
Financial (disadvantage) $41600
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	265000	408000	252000
Variable manufacturing and selling expenses	479000	117000	209000	153000
Contribution margin (loss)	446000	148000	199000	99000
Traceable fixed expenses:
Advertising, traceable	70100	8700	40500	20900
Depreciation on special equipment	44100	21000	8000	15100
Salaries of product manager	114700	40100	38100	36500
Total traceable fixed expenses	228900	69800	86600	72500
Product line segment margin	217100	78200	112400	26500
Common fixed expenses	185000
Net operating income (loss)	32100