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	$	925,000		$	267,000		$	406,000		$	252,000
Variable manufacturing and selling expenses		473,000			115,000			200,000			158,000
Contribution margin		452,000			152,000			206,000			94,000
Fixed expenses:
Advertising, traceable		70,400			9,000			40,800			20,600
Depreciation of special equipment		43,600			20,600			7,600			15,400
Salaries of product-line managers		114,800			40,200			38,700			35,900
Allocated common fixed expenses*		185,000			53,400			81,200			50,400
Total fixed expenses		413,800			123,200			168,300			122,300
Net operating income (loss)	$	38,200		$	28,800		$	37,700		$	(28,300)

*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	925000	673000	-252000
Variable manufacturing and selling expenses	473000	315000	158000
Contribution margin (loss)	452000	358000	-94000
Fixed expenses:
Advertising, traceable	70400	49800	20600
Depreciation on special equipment	43600	43600	0
Salaries of product manager	114800	78900	35900
Common allocated costs	185000	185000	0
Total fixed expenses	413800	357300	56500
Net operating income (loss)	38200	700	-37500
Financial (disadvantage) $(37500)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	267000	406000	252000
Variable manufacturing and selling expenses	473000	115000	200000	158000
Contribution margin (loss)	452000	152000	206000	94000
Traceable fixed expenses:
Advertising, traceable	70400	9000	40800	20600
Depreciation on special equipment	43600	20600	7600	15400
Salaries of product manager	114800	40200	38700	35900
Total traceable fixed expenses	228800	69800	87100	71900
Product line segment margin	223200	82200	118900	22100
Common fixed expenses	185000
Net operating income (loss)	38200