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	$	936,000		$	269,000		$	409,000		$	258,000
Variable manufacturing and selling expenses		473,000			113,000			201,000			159,000
Contribution margin		463,000			156,000			208,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,500			40,600			20,600
Depreciation of special equipment		43,000			20,600			7,100			15,300
Salaries of product-line managers		115,200			40,300			38,600			36,300
Allocated common fixed expenses*		187,200			53,800			81,800			51,600
Total fixed expenses		415,100			123,200			168,100			123,800
Net operating income (loss)	$	47,900		$	32,800		$	39,900		$	(24,800)

*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