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	$	300,000			$	90,000			$	150,000			$	60,000
Variable manufacturing and selling expenses		120,000				27,000				60,000				33,000
Contribution margin		180,000				63,000				90,000				27,000
Fixed expenses:
Advertising, traceable		30,000				10,000				14,000				6,000
Depreciation of special equipment		23,000				6,000				9,000				8,000
Salaries of product-line managers		35,000				12,000				13,000				10,000
Allocated common fixed expenses*		60,000				18,000				30,000				12,000
Total fixed expenses		148,000				46,000				66,000				36,000
Net operating income (loss)	$	32,000			$	17,000			$	24,000			$	(9,000	)

*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:

1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.)

1b. Should production and sale of the racing bikes be discontinued?

	Yes
	No

2a. Prepare a segmented income statement.

2b. Would a segmented income statement format be more usable to management in assessing the long-run profitability of the various product lines.

	Yes
	No

Answer 1