Question

he 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 $ 933,000 $ 266,000 $ 407,000 $ 260,000 Variable manufacturing and selling expenses 474,000 116,000 205,000 153,000 Contribution margin 459,000 150,000 202,000 107,000 Fixed expenses: Advertising, traceable 69,400 8,200 40,500 20,700 Depreciation of special equipment 42,700 20,300 7,300 15,100 Salaries of product-line managers 116,300 40,700 38,600 37,000 Allocated common fixed expenses* 186,600 53,200 81,400 52,000 Total fixed expenses 415,000 122,400 167,800 124,800 Net operating income (loss) $ 44,000 $ 27,600 $ 34,200 $ (17,800) *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