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	$	927,000		$	269,000		$	405,000		$	253,000
Variable manufacturing and selling expenses		469,000			119,000			198,000			152,000
Contribution margin		458,000			150,000			207,000			101,000
Fixed expenses:
Advertising, traceable		70,200			8,800			40,900			20,500
Depreciation of special equipment		42,800			20,400			7,300			15,100
Salaries of product-line managers		115,600			40,500			38,400			36,700
Allocated common fixed expenses*		185,400			53,800			81,000			50,600
Total fixed expenses		414,000			123,500			167,600			122,900
Net operating income (loss)	$	44,000		$	26,500		$	39,400		$	(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