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	$	931,000		$	268,000		$	405,000		$	258,000
Variable manufacturing and selling expenses		481,000			116,000			210,000			155,000
Contribution margin		450,000			152,000			195,000			103,000
Fixed expenses:
Advertising, traceable		69,400			8,300			40,600			20,500
Depreciation of special equipment		43,900			20,900			7,500			15,500
Salaries of product-line managers		115,500			40,900			38,000			36,600
Allocated common fixed expenses*		186,200			53,600			81,000			51,600
Total fixed expenses		415,000			123,700			167,100			124,200
Net operating income (loss)	$	35,000		$	28,300		$	27,900		$	(21,200)

*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	931000	673000	-258000
Variable manufacturing and selling expenses	481000	326000	155000
Contribution margin (loss)	450000	347000	-103000
Fixed expenses:
Advertising, traceable	69400	48900	20500
Depreciation on special equipment	43900	43900	0
Salaries of product manager	115500	78900	36600
Common allocated costs	186200	186200	0
Total fixed expenses	415000	357900	57100
Net operating income (loss)	35000	-10900	-45900
Financial (disadvantage) $(45900)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	931000	268000	405000	258000
Variable manufacturing and selling expenses	481000	116000	210000	155000
Contribution margin (loss)	450000	152000	195000	103000
Traceable fixed expenses:
Advertising, traceable	69400	8300	40600	20500
Depreciation on special equipment	43900	20900	7500	15500
Salaries of product manager	115500	40900	38000	36600
Total traceable fixed expenses	228800	70100	86100	72600
Product line segment margin	221200	81900	108900	30400
Common fixed expenses	186200
Net operating income (loss)	35000