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	$	921,000		$	267,000		$	403,000		$	251,000
Variable manufacturing and selling expenses		467,000			115,000			199,000			153,000
Contribution margin		454,000			152,000			204,000			98,000
Fixed expenses:
Advertising, traceable		69,800			8,200			40,800			20,800
Depreciation of special equipment		43,300			20,500			7,300			15,500
Salaries of product-line managers		116,200			40,500			38,800			36,900
Allocated common fixed expenses*		184,200			53,400			80,600			50,200
Total fixed expenses		413,500			122,600			167,500			123,400
Net operating income (loss)	$	40,500		$	29,400		$	36,500		$	(25,400)

*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	921000	670000	-251000
Variable manufacturing and selling expenses	467000	314000	153000
Contribution margin (loss)	454000	356000	-98000
Fixed expenses:
Advertising, traceable	69800	49000	20800
Depreciation on special equipment	43300	43300	0
Salaries of product manager	116200	79300	36900
Common allocated costs	184200	184200	0
Total fixed expenses	413500	355800	57700
Net operating income (loss)	40500	200	-40300
Financial (disadvantage) $(40300)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	267000	403000	251000
Variable manufacturing and selling expenses	467000	115000	199000	153000
Contribution margin (loss)	454000	152000	204000	98000
Traceable fixed expenses:
Advertising, traceable	69800	8200	40800	20800
Depreciation on special equipment	43300	20500	7300	15500
Salaries of product manager	116200	40500	38800	36900
Total traceable fixed expenses	229300	69200	86900	73200
Product line segment margin	224700	82800	117100	24800
Common fixed expenses	184200
Net operating income (loss)	40500