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	$	923,000		$	267,000		$	401,000		$	255,000
Variable manufacturing and selling expenses		472,000			115,000			207,000			150,000
Contribution margin		451,000			152,000			194,000			105,000
Fixed expenses:
Advertising, traceable		68,800			8,200			40,400			20,200
Depreciation of special equipment		43,700			20,900			7,600			15,200
Salaries of product-line managers		116,300			40,600			38,700			37,000
Allocated common fixed expenses*		184,600			53,400			80,200			51,000
Total fixed expenses		413,400			123,100			166,900			123,400
Net operating income (loss)	$	37,600		$	28,900		$	27,100		$	(18,400)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	923000	668000	-255000
Variable manufacturing and selling expenses	472000	322000	150000
Contribution margin (loss)	451000	346000	-105000
Fixed expenses:
Advertising, traceable	68800	48600	20200
Depreciation on special equipment	43700	43700	0
Salaries of product manager	116300	79300	37000
Common allocated costs	184600	184600	0
Total fixed expenses	413400	356200	57200
Net operating income (loss)	37600	-10200	-47800
Financial (disadvantage) $(47800)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	923000	267000	401000	255000
Variable manufacturing and selling expenses	472000	115000	207000	150000
Contribution margin (loss)	451000	152000	194000	105000
Traceable fixed expenses:
Advertising, traceable	68800	8200	40400	20200
Depreciation on special equipment	43700	20900	7600	15200
Salaries of product manager	116300	40600	38700	37000
Total traceable fixed expenses	228800	69700	86700	72400
Product line segment margin	222200	82300	107300	32600
Common fixed expenses	184600
Net operating income (loss)	37600