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	$	925,000		$	269,000		$	403,000		$	253,000
Variable manufacturing and selling expenses		474,000			113,000			204,000			157,000
Contribution margin		451,000			156,000			199,000			96,000
Fixed expenses:
Advertising, traceable		69,600			8,100			40,700			20,800
Depreciation of special equipment		43,300			20,800			7,300			15,200
Salaries of product-line managers		114,300			40,500			38,200			35,600
Allocated common fixed expenses*		185,000			53,800			80,600			50,600
Total fixed expenses		412,200			123,200			166,800			122,200
Net operating income (loss)	$	38,800		$	32,800		$	32,200		$	(26,200)

*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

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	925000	672000	-253000
Variable manufacturing and selling expenses	474000	317000	157000
Contribution margin (loss)	451000	355000	-96000
Fixed expenses:
Advertising, traceable	69600	48800	20800
Depreciation on special equipment	43300	43300	0
Salaries of product manager	114300	78700	35600
Common allocated costs	185000	185000	0
Total fixed expenses	412200	355800	56400
Net operating income (loss)	38800	-800	-39600
Financial (disadvantage) ($39600)
2
No,
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	269000	403000	253000
Variable manufacturing and selling expenses	474000	113000	204000	157000
Contribution margin (loss)	451000	156000	199000	96000
Traceable fixed expenses:
Advertising, traceable	69600	8100	40700	20800
Depreciation on special equipment	43300	20800	7300	15200
Salaries of product manager	114300	40500	38200	35600
Total traceable fixed expenses	227200	69400	86200	71600
Product line segment margin	223800	86600	112800	24400
Common fixed expenses	185000
Net operating income (loss)	38800