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	$	924,000		$	264,000		$	400,000		$	260,000
Variable manufacturing and selling expenses		468,000			120,000			195,000			153,000
Contribution margin		456,000			144,000			205,000			107,000
Fixed expenses:
Advertising, traceable		69,900			8,600			40,500			20,800
Depreciation of special equipment		44,100			20,900			7,600			15,600
Salaries of product-line managers		114,500			40,300			38,800			35,400
Allocated common fixed expenses*		184,800			52,800			80,000			52,000
Total fixed expenses		413,300			122,600			166,900			123,800
Net operating income (loss)	$	42,700		$	21,400		$	38,100		$	(16,800)

*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	924000	664000	-260000
Variable manufacturing and selling expenses	468000	315000	153000
Contribution margin (loss)	456000	349000	-107000
Fixed expenses:
Advertising, traceable	69900	49100	20800
Depreciation on special equipment	44100	44100	0
Salaries of product manager	114500	79100	35400
Common allocated costs	184800	184800	0
Total fixed expenses	413300	357100	56200
Net operating income (loss)	42700	-8100	-50800
Financial (disadvantage) (50800)
2
No, production and sale of racing bikes should not be discontinued as income will decrease by $50800 per quarter
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	264000	400000	260000
Variable manufacturing and selling expenses	468000	120000	195000	153000
Contribution margin (loss)	456000	144000	205000	107000
Traceable fixed expenses:
Advertising, traceable	69900	8600	40500	20800
Depreciation on special equipment	44100	20900	7600	15600
Salaries of product manager	114500	40300	38800	35400
Total traceable fixed expenses	228500	69800	86900	71800
Product line segment margin	227500	74200	118100	35200
Common fixed expenses	184800
Net operating income (loss)	42700