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 $ 915,000 $ 263,000 $ 402,000 $ 250,000 Variable manufacturing and selling expenses 474,000 114,000 201,000 159,000 Contribution margin 441,000 149,000 201,000 91,000 Fixed expenses: Advertising, traceable 69,100 8,200 40,400 20,500 Depreciation of special equipment 43,700 20,300 7,600 15,800 Salaries of product-line managers 115,500 40,800 38,300 36,400 Allocated common fixed expenses* 183,000 52,600 80,400 50,000 Total fixed expenses 411,300 121,900 166,700 122,700 Net operating income (loss) $ 29,700 $ 27,100 $ 34,300 $ (31,700) *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.

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