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	$	928,000		$	270,000		$	403,000		$	255,000
Variable manufacturing and selling expenses		465,000			120,000			190,000			155,000
Contribution margin		463,000			150,000			213,000			100,000
Fixed expenses:
Advertising, traceable		70,200			8,600			41,000			20,600
Depreciation of special equipment		43,400			20,400			7,600			15,400
Salaries of product-line managers		115,400			40,100			38,600			36,700
Allocated common fixed expenses*		185,600			54,000			80,600			51,000
Total fixed expenses		414,600			123,100			167,800			123,700
Net operating income (loss)	$	48,400		$	26,900		$	45,200		$	(23,700)

*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