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	$	932,000		$	268,000		$	406,000		$	258,000
Variable manufacturing and selling expenses		486,000			119,000			208,000			159,000
Contribution margin		446,000			149,000			198,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,200			40,600			20,900
Depreciation of special equipment		43,700			20,800			7,500			15,400
Salaries of product-line managers		115,400			40,800			38,300			36,300
Allocated common fixed expenses*		186,400			53,600			81,200			51,600
Total fixed expenses		415,200			123,400			167,600			124,200
Net operating income (loss)	$	30,800		$	25,600		$	30,400		$	(25,200)

*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