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	$	928,000		$	268,000		$	406,000		$	254,000
Variable manufacturing and selling expenses		465,000			116,000			197,000			152,000
Contribution margin		463,000			152,000			209,000			102,000
Fixed expenses:
Advertising, traceable		70,400			9,000			40,800			20,600
Depreciation of special equipment		44,300			20,700			7,700			15,900
Salaries of product-line managers		115,600			40,400			38,700			36,500
Allocated common fixed expenses*		185,600			53,600			81,200			50,800
Total fixed expenses		415,900			123,700			168,400			123,800
Net operating income (loss)	$	47,100		$	28,300		$	40,600		$	(21,800)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	928000	674000	-254000
Variable manufacturing and selling expenses	465000	313000	152000
Contribution margin (loss)	463000	361000	-102000
Fixed expenses:
Advertising, traceable	70400	49800	20600
Depreciation on special equipment	44300	44300	0
Salaries of product manager	115600	79100	36500
Common allocated costs	185600	185600	0
Total fixed expenses	415900	358800	57100
Net operating income (loss)	47100	2200	-44900
Financial (disadvantage) ($44900)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	928000	268000	406000	254000
Variable manufacturing and selling expenses	465000	116000	197000	152000
Contribution margin (loss)	463000	152000	209000	102000
Traceable fixed expenses:
Advertising, traceable	70400	9000	40800	20600
Depreciation on special equipment	44300	20700	7700	15900
Salaries of product manager	115600	40400	38700	36500
Total traceable fixed expenses	230300	70100	87200	73000
Product line segment margin	232700	81900	121800	29000
Common fixed expenses	185600
Net operating income (loss)	47100