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	$	929,000		$	267,000		$	404,000		$	258,000
Variable manufacturing and selling expenses		485,000			119,000			209,000			157,000
Contribution margin		444,000			148,000			195,000			101,000
Fixed expenses:
Advertising, traceable		69,900			8,500			40,900			20,500
Depreciation of special equipment		43,900			20,800			8,000			15,100
Salaries of product-line managers		114,200			40,400			38,100			35,700
Allocated common fixed expenses*		185,800			53,400			80,800			51,600
Total fixed expenses		413,800			123,100			167,800			122,900
Net operating income (loss)	$	30,200		$	24,900		$	27,200		$	(21,900)

*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	929000	671000	-258000
Variable manufacturing and selling expenses	485000	328000	157000
Contribution margin (loss)	444000	343000	-101000
Fixed expenses:
Advertising, traceable	69900	49400	20500
Depreciation on special equipment	43900	43900	0
Salaries of product manager	114200	78500	35700
Common allocated costs	185800	185800	0
Total fixed expenses	413800	357600	56200
Net operating income (loss)	30200	-14600	-44800
Financial (disadvantage) $(44800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	929000	267000	404000	258000
Variable manufacturing and selling expenses	485000	119000	209000	157000
Contribution margin (loss)	444000	148000	195000	101000
Traceable fixed expenses:
Advertising, traceable	69900	8500	40900	20500
Depreciation on special equipment	43900	20800	8000	15100
Salaries of product manager	114200	40400	38100	35700
Total traceable fixed expenses	228000	69700	87000	71300
Product line segment margin	216000	78300	108000	29700
Common fixed expenses	185800
Net operating income (loss)	30200