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 $ 924,000 $ 267,000 $ 403,000 $ 254,000 Variable manufacturing and selling expenses 468,000 119,000 194,000 155,000 Contribution margin 456,000 148,000 209,000 99,000 Fixed expenses: Advertising, traceable 69,900 8,300 40,600 21,000 Depreciation of special equipment 43,900 20,900 7,500 15,500 Salaries of product-line managers 116,100 40,800 38,500 36,800 Allocated common fixed expenses* 184,800 53,400 80,600 50,800 Total fixed expenses 414,700 123,400 167,200 124,100 Net operating income (loss) $ 41,300 $ 24,600 $ 41,800 $ (25,100) *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