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	$	931,000		$	267,000		$	409,000		$	255,000
Variable manufacturing and selling expenses		469,000			113,000			203,000			153,000
Contribution margin		462,000			154,000			206,000			102,000
Fixed expenses:
Advertising, traceable		69,000			8,300			40,500			20,200
Depreciation of special equipment		44,600			20,900			7,900			15,800
Salaries of product-line managers		115,500			40,400			38,700			36,400
Allocated common fixed expenses*		186,200			53,400			81,800			51,000
Total fixed expenses		415,300			123,000			168,900			123,400
Net operating income (loss)	$	46,700		$	31,000		$	37,100		$	(21,400)

*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