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 $ 923,000 $ 265,000 $ 400,000 $ 258,000 Variable manufacturing and selling expenses 464,000 116,000 197,000 151,000 Contribution margin 459,000 149,000 203,000 107,000 Fixed expenses: Advertising, traceable 70,000 8,900 40,200 20,900 Depreciation of special equipment 44,400 21,000 7,900 15,500 Salaries of product-line managers 115,800 40,800 38,600 36,400 Allocated common fixed expenses* 184,600 53,000 80,000 51,600 Total fixed expenses 414,800 123,700 166,700 124,400 Net operating income (loss) $ 44,200 $ 25,300 $ 36,300 $ (17,400) *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