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		$	401,000		$	259,000
Variable manufacturing and selling expenses		474,000			116,000			204,000			154,000
Contribution margin		454,000			152,000			197,000			105,000
Fixed expenses:
Advertising, traceable		70,600			8,800			41,000			20,800
Depreciation of special equipment		42,700			20,100			7,400			15,200
Salaries of product-line managers		114,400			40,100			38,900			35,400
Allocated common fixed expenses*		185,600			53,600			80,200			51,800
Total fixed expenses		413,300			122,600			167,500			123,200
Net operating income (loss)	$	40,700		$	29,400		$	29,500		$	(18,200)

*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