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	$	923,000		$	267,000		$	402,000		$	254,000
Variable manufacturing and selling expenses		482,000			119,000			206,000			157,000
Contribution margin		441,000			148,000			196,000			97,000
Fixed expenses:
Advertising, traceable		69,700			8,700			40,200			20,800
Depreciation of special equipment		42,700			20,200			7,300			15,200
Salaries of product-line managers		115,100			41,000			38,100			36,000
Allocated common fixed expenses*		184,600			53,400			80,400			50,800
Total fixed expenses		412,100			123,300			166,000			122,800
Net operating income (loss)	$	28,900		$	24,700		$	30,000		$	(25,800)

*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