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	$	922,000		$	266,000		$	404,000		$	252,000
Variable manufacturing and selling expenses		475,000			114,000			208,000			153,000
Contribution margin		447,000			152,000			196,000			99,000
Fixed expenses:
Advertising, traceable		70,100			8,300			40,900			20,900
Depreciation of special equipment		43,400			20,300			7,500			15,600
Salaries of product-line managers		114,500			41,000			38,500			35,000
Allocated common fixed expenses*		184,400			53,200			80,800			50,400
Total fixed expenses		412,400			122,800			167,700			121,900
Net operating income (loss)	$	34,600		$	29,200		$	28,300		$	(22,900)

*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: NetOperatingIncome
Sales	922000	670000	-252000
Variable manufacturing and selling expenses	475000	322000	153000
Contribution margin (loss)	447000	348000	-99000
Fixed expenses:
Advertising, traceable	70100	49200	20900
Depreciation on special equipment	43400	43400	0
Salaries of product manager	114500	79500	35000
Common allocated costs	184400	184400	0
Total fixed expenses	412400	356500	55900
Net operating income (loss)	34600	-8500	-43100
Financial (disadvantage) ($43100)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922000	266000	404000	252000
Variable manufacturing and selling expenses	475000	114000	208000	153000
Contribution margin (loss)	447000	152000	196000	99000
Traceable fixed expenses:
Advertising, traceable	70100	8300	40900	20900
Depreciation on special equipment	43400	20300	7500	15600
Salaries of product manager	114500	41000	38500	35000
Total traceable fixed expenses	228000	69600	86900	71500
Product line segment margin	219000	82400	109100	27500
Common fixed expenses	184400
Net operating income (loss)	34600