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 $ 269,000 $ 406,000 $ 252,000 Variable manufacturing and selling expenses 473,000 117,000 204,000 152,000 Contribution margin 454,000 152,000 202,000 100,000 Fixed expenses: Advertising, traceable 69,600 8,200 40,500 20,900 Depreciation of special equipment 44,000 20,500 7,500 16,000 Salaries of product-line managers 113,900 40,100 38,700 35,100 Allocated common fixed expenses* 185,400 53,800 81,200 50,400 Total fixed expenses 412,900 122,600 167,900 122,400 Net operating income (loss) $ 41,100 $ 29,400 $ 34,100 $ (22,400) *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

Solution: