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	$	929,000		$	265,000		$	408,000		$	256,000
Variable manufacturing and selling expenses		465,000			117,000			196,000			152,000
Contribution margin		464,000			148,000			212,000			104,000
Fixed expenses:
Advertising, traceable		69,900			8,900			40,900			20,100
Depreciation of special equipment		43,100			20,100			7,200			15,800
Salaries of product-line managers		114,300			40,400			38,100			35,800
Allocated common fixed expenses*		185,800			53,000			81,600			51,200
Total fixed expenses		413,100			122,400			167,800			122,900
Net operating income (loss)	$	50,900		$	25,600		$	44,200		$	(18,900)

*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