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 $ 922,000 $ 261,000 $ 410,000 $ 251,000 Variable manufacturing and selling expenses 462,000 118,000 190,000 154,000 Contribution margin 460,000 143,000 220,000 97,000 Fixed expenses: Advertising, traceable 69,600 8,400 40,400 20,800 Depreciation of special equipment 43,500 20,300 7,700 15,500 Salaries of product-line managers 115,500 40,700 38,700 36,100 Allocated common fixed expenses* 184,400 52,200 82,000 50,200 Total fixed expenses 413,000 121,600 168,800 122,600 Net operating income (loss) $ 47,000 $ 21,400 $ 51,200 $ (25,600) *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.

6.9.1

Answer 1