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	$	925,000		$	270,000		$	401,000		$	254,000
Variable manufacturing and selling expenses		464,000			111,000			196,000			157,000
Contribution margin		461,000			159,000			205,000			97,000
Fixed expenses:
Advertising, traceable		68,900			8,300			40,200			20,400
Depreciation of special equipment		44,100			20,800			7,700			15,600
Salaries of product-line managers		114,800			40,100			38,900			35,800
Allocated common fixed expenses*		185,000			54,000			80,200			50,800
Total fixed expenses		412,800			123,200			167,000			122,600
Net operating income (loss)	$	48,200		$	35,800		$	38,000		$	(25,600)

*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