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	$	931,000		$	269,000		$	407,000		$	255,000
Variable manufacturing and selling expenses		468,000			117,000			194,000			157,000
Contribution margin		463,000			152,000			213,000			98,000
Fixed expenses:
Advertising, traceable		69,400			8,500			40,400			20,500
Depreciation of special equipment		44,200			21,000			7,400			15,800
Salaries of product-line managers		115,900			41,000			38,900			36,000
Allocated common fixed expenses*		186,200			53,800			81,400			51,000
Total fixed expenses		415,700			124,300			168,100			123,300
Net operating income (loss)	$	47,300		$	27,700		$	44,900		$	(25,300)

*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)	Financial Disadvantage	(41,500)
	Current net operating income	47,300
	Less: Loss of Contribution margin by dropping Racing Bikes segment	(98,000)
	Add: Saving in traceable fixed cost belongs to racing bike segment	56,500	(20500+36000)
	Total income of The Regal Cycle company after dropping racing bike segment	5,800
	Financial Disadvantage	(41,500)
2)	No, production and sale of racing bikes should not be discontinued
3)		Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	931,000	269,000	407,000	255,000
	Variable manufacturing and selling Expenses	468,000	117,000	194,000	157,000
	Contribution Margin	463,000	152,000	213,000	98,000
	Traceable Fixed Expenses:
	Advertising, Traceable	69,400	8,500	40,400	20,500
	Depreciation of Special Equipments	44,200	21,000	7,400	15,800
	Saalries of Product Line Workers	115,900	41,000	38,900	36,000
	Total Traceable fixed expense	229,500	70,500	86,700	72,300
	Product Line Segment Margin/(Loss)	233,500	81,500	126,300	25,700
	Common Fixed cost	186,200
	Net Operating Income / (Loss)	47,300