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	$	932,000		$	265,000		$	408,000		$	259,000
Variable manufacturing and selling expenses		461,000			114,000			197,000			150,000
Contribution margin		471,000			151,000			211,000			109,000
Fixed expenses:
Advertising, traceable		69,000			8,600			40,100			20,300
Depreciation of special equipment		44,300			21,000			7,700			15,600
Salaries of product-line managers		114,800			40,800			38,200			35,800
Allocated common fixed expenses*		186,400			53,000			81,600			51,800
Total fixed expenses		414,500			123,400			167,600			123,500
Net operating income (loss)	$	56,500		$	27,600		$	43,400		$	(14,500)

*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.

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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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Sales Variable manufacturing and selling expenses Contribution margin (loss) 0 0 0 0 Traceable fixed expenses: Advertising Depreciation of special equipment Salaries of the product line managers Total traceable fixed expenses 0 0 0 0 Product line segment margin (loss) 0 $0 $0 $0 Common fixed expenses Net operating income (loss) $0

Answer 1