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		$	267,000		$	404,000		$	251,000
Variable manufacturing and selling expenses		475,000			114,000			208,000			153,000
Contribution margin		447,000			153,000			196,000			98,000
Fixed expenses:
Advertising, traceable		69,300			8,600			40,200			20,500
Depreciation of special equipment		43,600			20,300			8,000			15,300
Salaries of product-line managers		115,300			40,100			38,300			36,900
Allocated common fixed expenses*		184,400			53,400			80,800			50,200
Total fixed expenses		412,600			122,400			167,300			122,900
Net operating income (loss)	$	34,400		$	30,600		$	28,700		$	(24,900)

*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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Net operating income (loss) $0

Answer 1