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		$	261,000		$	404,000		$	259,000
Variable manufacturing and selling expenses		469,000			112,000			203,000			154,000
Contribution margin		455,000			149,000			201,000			105,000
Fixed expenses:
Advertising, traceable		68,900			8,200			40,300			20,400
Depreciation of special equipment		43,700			20,900			7,600			15,200
Salaries of product-line managers		115,800			40,800			38,800			36,200
Allocated common fixed expenses*		184,800			52,200			80,800			51,800
Total fixed expenses		413,200			122,100			167,500			123,600
Net operating income (loss)	$	41,800		$	26,900		$	33,500		$	(18,600)

*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	469000	315000	154000
Contribution margin (loss)	455000	350000	-105000
Fixed expenses:
Advertising, traceable	68900	48500	20400
Depreciation on special equipment	43700	43700	0
Salaries of product manager	115800	79600	36200
Common allocated costs	184800	184800	0
Total fixed expenses	413200	356600	56600
Net operating income (loss)	41800	-6600	-48400
Financial (disadvantage) $(48400)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	261000	404000	259000
Variable manufacturing and selling expenses	469000	112000	203000	154000
Contribution margin (loss)	455000	149000	201000	105000
Traceable fixed expenses:
Advertising, traceable	68900	8200	40300	20400
Depreciation on special equipment	43700	20900	7600	15200
Salaries of product manager	115800	40800	38800	36200
Total traceable fixed expenses	228400	69900	86700	71800
Product line segment margin	226600	79100	114300	33200
Common fixed expenses	184800
Net operating income (loss)	41800