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	$	930,000		$	267,000		$	406,000		$	257,000
Variable manufacturing and selling expenses		473,000			117,000			203,000			153,000
Contribution margin		457,000			150,000			203,000			104,000
Fixed expenses:
Advertising, traceable		69,600			8,900			40,600			20,100
Depreciation of special equipment		44,100			21,000			7,700			15,400
Salaries of product-line managers		114,600			40,100			38,700			35,800
Allocated common fixed expenses*		186,000			53,400			81,200			51,400
Total fixed expenses		414,300			123,400			168,200			122,700
Net operating income (loss)	$	42,700		$	26,600		$	34,800		$	(18,700)

*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