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	$	930,000		$	268,000		$	406,000		$	256,000
Variable manufacturing and selling expenses		466,000			110,000			204,000			152,000
Contribution margin		464,000			158,000			202,000			104,000
Fixed expenses:
Advertising, traceable		70,000			8,900			40,800			20,300
Depreciation of special equipment		43,700			20,200			7,600			15,900
Salaries of product-line managers		114,600			40,000			38,200			36,400
Allocated common fixed expenses*		186,000			53,600			81,200			51,200
Total fixed expenses		414,300			122,700			167,800			123,800
Net operating income (loss)	$	49,700		$	35,300		$	34,200		$	(19,800)

*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