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	$	927,000		$	267,000		$	406,000		$	254,000
Variable manufacturing and selling expenses		461,000			118,000			191,000			152,000
Contribution margin		466,000			149,000			215,000			102,000
Fixed expenses:
Advertising, traceable		69,000			8,400			40,400			20,200
Depreciation of special equipment		43,300			20,100			7,700			15,500
Salaries of product-line managers		114,900			40,900			38,600			35,400
Allocated common fixed expenses*		185,400			53,400			81,200			50,800
Total fixed expenses		412,600			122,800			167,900			121,900
Net operating income (loss)	$	53,400		$	26,200		$	47,100		$	(19,900)

*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

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