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	$	926,000		$	261,000		$	408,000		$	257,000
Variable manufacturing and selling expenses		468,000			118,000			191,000			159,000
Contribution margin		458,000			143,000			217,000			98,000
Fixed expenses:
Advertising, traceable		68,900			8,300			40,300			20,300
Depreciation of special equipment		43,500			20,500			7,400			15,600
Salaries of product-line managers		114,000			40,700			38,300			35,000
Allocated common fixed expenses*		185,200			52,200			81,600			51,400
Total fixed expenses		411,600			121,700			167,600			122,300
Net operating income (loss)	$	46,400		$	21,300		$	49,400		$	(24,300)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	926000	669000	-257000
Variable manufacturing and selling expenses	468000	309000	159000
Contribution margin (loss)	458000	360000	-98000
Fixed expenses:
Advertising, traceable	68900	48600	20300
Depreciation on special equipment	43500	43500	0
Salaries of product manager	114000	79000	35000
Common allocated costs	185200	185200	0
Total fixed expenses	411600	356300	55300
Net operating income (loss)	46400	3700	-42700
Financial (disadvantage) (42700)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	926000	261000	408000	257000
Variable manufacturing and selling expenses	468000	118000	191000	159000
Contribution margin (loss)	458000	143000	217000	98000
Traceable fixed expenses:
Advertising, traceable	68900	8300	40300	20300
Depreciation on special equipment	43500	20500	7400	15600
Salaries of product manager	114000	40700	38300	35000
Total traceable fixed expenses	226400	69500	86000	70900
Product line segment margin	231600	73500	131000	27100
Common fixed expenses	185200
Net operating income (loss)	46400