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	$	928,000		$	269,000		$	403,000		$	256,000
Variable manufacturing and selling expenses		469,000			112,000			202,000			155,000
Contribution margin		459,000			157,000			201,000			101,000
Fixed expenses:
Advertising, traceable		69,500			8,800			40,600			20,100
Depreciation of special equipment		43,100			20,200			7,100			15,800
Salaries of product-line managers		114,100			40,100			38,400			35,600
Allocated common fixed expenses*		185,600			53,800			80,600			51,200
Total fixed expenses		412,300			122,900			166,700			122,700
Net operating income (loss)	$	46,700		$	34,100		$	34,300		$	(21,700)

*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