Question

Please show how you came up with the answer.

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	$	934,000		$	269,000		$	409,000		$	256,000
Variable manufacturing and selling expenses		471,000			111,000			203,000			157,000
Contribution margin		463,000			158,000			206,000			99,000
Fixed expenses:
Advertising, traceable		69,600			8,300			40,400			20,900
Depreciation of special equipment		44,500			20,700			7,800			16,000
Salaries of product-line managers		115,300			40,500			38,500			36,300
Allocated common fixed expenses*		186,800			53,800			81,800			51,200
Total fixed expenses		416,200			123,300			168,500			124,400
Net operating income (loss)	$	46,800		$	34,700		$	37,500		$	(25,400)

*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