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	$	924,000		$	263,000		$	402,000		$	259,000
Variable manufacturing and selling expenses		460,000			111,000			199,000			150,000
Contribution margin		464,000			152,000			203,000			109,000
Fixed expenses:
Advertising, traceable		70,100			8,900			40,200			21,000
Depreciation of special equipment		43,900			20,600			7,900			15,400
Salaries of product-line managers		115,500			40,600			38,700			36,200
Allocated common fixed expenses*		184,800			52,600			80,400			51,800
Total fixed expenses		414,300			122,700			167,200			124,400
Net operating income (loss)	$	49,700		$	29,300		$	35,800		$	(15,400)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	924000	665000	-259000
Variable manufacturing and selling expenses	460000	310000	150000
Contribution margin (loss)	464000	355000	-109000
Fixed expenses:
Advertising, traceable	70100	49100	21000
Depreciation on special equipment	43900	43900	0
Salaries of product manager	115500	79300	36200
Common allocated costs	184800	184800	0
Total fixed expenses	414300	357100	57200
Net operating income (loss)	49700	-2100	-51800
Financial (disadvantage) $(51800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	263000	402000	259000
Variable manufacturing and selling expenses	460000	111000	199000	150000
Contribution margin (loss)	464000	152000	203000	109000
Traceable fixed expenses:
Advertising, traceable	70100	8900	40200	21000
Depreciation on special equipment	43900	20600	7900	15400
Salaries of product manager	115500	40600	38700	36200
Total traceable fixed expenses	229500	70100	86800	72600
Product line segment margin	234500	81900	116200	36400
Common fixed expenses	184800
Net operating income (loss)	49700