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		$	262,000		$	406,000		$	253,000
Variable manufacturing and selling expenses		480,000			120,000			206,000			154,000
Contribution margin		441,000			142,000			200,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,700			40,500			20,900
Depreciation of special equipment		44,000			20,900			7,300			15,800
Salaries of product-line managers		114,900			40,500			38,800			35,600
Allocated common fixed expenses*		184,200			52,400			81,200			50,600
Total fixed expenses		413,200			122,500			167,800			122,900
Net operating income (loss)	$	27,800		$	19,500		$	32,200		$	(23,900)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	921000	668000	-253000
Variable manufacturing and selling expenses	480000	326000	154000
Contribution margin (loss)	441000	342000	-99000
Fixed expenses:
Advertising, traceable	70100	49200	20900
Depreciation on special equipment	44000	44000	0
Salaries of product manager	114900	79300	35600
Common allocated costs	184200	184200	0
Total fixed expenses	413200	356700	56500
Net operating income (loss)	27800	-14700	-42500
Financial (disadvantage) (42500)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	262000	406000	253000
Variable manufacturing and selling expenses	480000	120000	206000	154000
Contribution margin (loss)	441000	142000	200000	99000
Traceable fixed expenses:
Advertising, traceable	70100	8700	40500	20900
Depreciation on special equipment	44000	20900	7300	15800
Salaries of product manager	114900	40500	38800	35600
Total traceable fixed expenses	229000	70100	86600	72300
Product line segment margin	212000	71900	113400	26700
Common fixed expenses	184200
Net operating income (loss)	27800