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	$	930,000		$	265,000		$	406,000		$	259,000
Variable manufacturing and selling expenses		464,000			116,000			196,000			152,000
Contribution margin		466,000			149,000			210,000			107,000
Fixed expenses:
Advertising, traceable		70,000			8,900			40,500			20,600
Depreciation of special equipment		43,100			20,200			7,300			15,600
Salaries of product-line managers		116,100			40,900			38,500			36,700
Allocated common fixed expenses*		186,000			53,000			81,200			51,800
Total fixed expenses		415,200			123,000			167,500			124,700
Net operating income (loss)	$	50,800		$	26,000		$	42,500		$	(17,700)

*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