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	$	936,000		$	268,000		$	409,000		$	259,000
Variable manufacturing and selling expenses		462,000			116,000			193,000			153,000
Contribution margin		474,000			152,000			216,000			106,000
Fixed expenses:
Advertising, traceable		70,100			9,000			40,600			20,500
Depreciation of special equipment		43,800			20,600			7,800			15,400
Salaries of product-line managers		114,100			40,400			38,400			35,300
Allocated common fixed expenses*		187,200			53,600			81,800			51,800
Total fixed expenses		415,200			123,600			168,600			123,000
Net operating income (loss)	$	58,800		$	28,400		$	47,400		$	(17,000)

*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.

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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Net operating income (loss) $0

*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