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		485,000			119,000			208,000			158,000
Contribution margin		436,000			142,000			198,000			96,000
Fixed expenses:
Advertising, traceable		70,100			8,900			40,200			21,000
Depreciation of special equipment		43,600			20,900			7,400			15,300
Salaries of product-line managers		114,100			40,400			38,300			35,400
Allocated common fixed expenses*		184,200			52,200			81,200			50,800
Total fixed expenses		412,000			122,400			167,100			122,500
Net operating income (loss)	$	24,000		$	19,600		$	30,900		$	(26,500)

*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