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	$	921,000		$	261,000		$	406,000		$	254,000
Variable manufacturing and selling expenses		471,000			116,000			199,000			156,000
Contribution margin		450,000			145,000			207,000			98,000
Fixed expenses:
Advertising, traceable		69,800			8,700			40,900			20,200
Depreciation of special equipment		43,800			21,000			7,500			15,300
Salaries of product-line managers		116,300			40,400			38,900			37,000
Allocated common fixed expenses*		184,200			52,200			81,200			50,800
Total fixed expenses		414,100			122,300			168,500			123,300
Net operating income (loss)	$	35,900		$	22,700		$	38,500		$	(25,300)

*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