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		$	268,000		$	409,000		$	254,000
Variable manufacturing and selling expenses		469,000			114,000			197,000			158,000
Contribution margin		462,000			154,000			212,000			96,000
Fixed expenses:
Advertising, traceable		69,700			8,500			40,900			20,300
Depreciation of special equipment		43,800			20,600			7,500			15,700
Salaries of product-line managers		116,200			40,900			38,600			36,700
Allocated common fixed expenses*		186,200			53,600			81,800			50,800
Total fixed expenses		415,900			123,600			168,800			123,500
Net operating income (loss)	$	46,100		$	30,400		$	43,200		$	(27,500)

*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

Hope you understood the solution. If you have any doubt please leave your doubt in the comment section so that I can clarify your doubt.

Thank you.