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		$	264,000		$	408,000		$	253,000
Variable manufacturing and selling expenses		470,000			115,000			196,000			159,000
Contribution margin		455,000			149,000			212,000			94,000
Fixed expenses:
Advertising, traceable		69,000			8,100			40,300			20,600
Depreciation of special equipment		43,900			20,100			8,000			15,800
Salaries of product-line managers		115,000			40,000			38,100			36,900
Allocated common fixed expenses*		185,000			52,800			81,600			50,600
Total fixed expenses		412,900			121,000			168,000			123,900
Net operating income (loss)	$	42,100		$	28,000		$	44,000		$	(29,900)

*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?

Answer 1

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