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	$	917,000		$	261,000		$	403,000		$	253,000
Variable manufacturing and selling expenses		467,000			115,000			200,000			152,000
Contribution margin		450,000			146,000			203,000			101,000
Fixed expenses:
Advertising, traceable		69,000			8,400			40,400			20,200
Depreciation of special equipment		43,300			20,600			7,200			15,500
Salaries of product-line managers		115,000			40,000			38,600			36,400
Allocated common fixed expenses*		183,400			52,200			80,600			50,600
Total fixed expenses		410,700			121,200			166,800			122,700
Net operating income (loss)	$	39,300		$	24,800		$	36,200		$	(21,700)

*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.

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	917000	664000	-253000
Variable manufacturing and selling expenses	467000	315000	152000
Contribution margin (loss)	450000	349000	-101000
Fixed expenses:
Advertising, traceable	69000	48800	20200
Depreciation on special equipment	43300	43300	0
Salaries of product manager	115000	78600	36400
Common allocated costs	183400	183400	0
Total fixed expenses	410700	354100	56600
Net operating income (loss)	39300	-5100	-44400
Financial (disadvantage) $(44400)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	917000	261000	403000	253000
Variable manufacturing and selling expenses	467000	115000	200000	152000
Contribution margin (loss)	450000	146000	203000	101000
Traceable fixed expenses:
Advertising, traceable	69000	8400	40400	20200
Depreciation on special equipment	43300	20600	7200	15500
Salaries of product manager	115000	40000	38600	36400
Total traceable fixed expenses	227300	69000	86200	72100
Product line segment margin	222700	77000	116800	28900
Common fixed expenses	183400
Net operating income (loss)	39300