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		$	264,000		$	402,000		$	256,000
Variable manufacturing and selling expenses		467,000			112,000			198,000			157,000
Contribution margin		455,000			152,000			204,000			99,000
Fixed expenses:
Advertising, traceable		69,400			8,500			40,600			20,300
Depreciation of special equipment		43,400			20,100			7,500			15,800
Salaries of product-line managers		113,400			40,000			38,300			35,100
Allocated common fixed expenses*		184,400			52,800			80,400			51,200
Total fixed expenses		410,600			121,400			166,800			122,400
Net operating income (loss)	$	44,400		$	30,600		$	37,200		$	(23,400)

*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