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	$	922,000		$	269,000		$	402,000		$	251,000
Variable manufacturing and selling expenses		454,000			113,000			190,000			151,000
Contribution margin		468,000			156,000			212,000			100,000
Fixed expenses:
Advertising, traceable		69,400			8,300			40,700			20,400
Depreciation of special equipment		43,800			20,500			7,600			15,700
Salaries of product-line managers		114,800			40,800			38,500			35,500
Allocated common fixed expenses*		184,400			53,800			80,400			50,200
Total fixed expenses		412,400			123,400			167,200			121,800
Net operating income (loss)	$	55,600		$	32,600		$	44,800		$	(21,800)

*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:

1a. What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

1b. Should the production and sale of racing bikes be discontinued?

1.c. 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