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	$	918,000		$	263,000		$	404,000		$	251,000
Variable manufacturing and selling expenses		473,000			114,000			204,000			155,000
Contribution margin		445,000			149,000			200,000			96,000
Fixed expenses:
Advertising, traceable		69,000			8,300			40,200			20,500
Depreciation of special equipment		43,700			20,500			8,000			15,200
Salaries of product-line managers		114,000			40,400			38,400			35,200
Allocated common fixed expenses*		183,600			52,600			80,800			50,200
Total fixed expenses		410,300			121,800			167,400			121,100
Net operating income (loss)	$	34,700		$	27,200		$	32,600		$	(25,100)

*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