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	$	935,000		$	268,000		$	408,000		$	259,000
Variable manufacturing and selling expenses		480,000			116,000			206,000			158,000
Contribution margin		455,000			152,000			202,000			101,000
Fixed expenses:
Advertising, traceable		70,300			8,700			41,000			20,600
Depreciation of special equipment		43,400			20,900			7,200			15,300
Salaries of product-line managers		116,100			40,600			38,700			36,800
Allocated common fixed expenses*		187,000			53,600			81,600			51,800
Total fixed expenses		416,800			123,800			168,500			124,500
Net operating income (loss)	$	38,200		$	28,200		$	33,500		$	(23,500)

*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