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	$	925,000		$	265,000		$	405,000		$	255,000
Variable manufacturing and selling expenses		473,000			119,000			196,000			158,000
Contribution margin		452,000			146,000			209,000			97,000
Fixed expenses:
Advertising, traceable		69,400			8,800			40,500			20,100
Depreciation of special equipment		43,200			20,700			7,300			15,200
Salaries of product-line managers		114,300			40,300			38,100			35,900
Allocated common fixed expenses*		185,000			53,000			81,000			51,000
Total fixed expenses		411,900			122,800			166,900			122,200
Net operating income (loss)	$	40,100		$	23,200		$	42,100		$	(25,200)

*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