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	$	936,000		$	270,000		$	406,000		$	260,000
Variable manufacturing and selling expenses		470,000			112,000			203,000			155,000
Contribution margin		466,000			158,000			203,000			105,000
Fixed expenses:
Advertising, traceable		69,200			8,400			40,500			20,300
Depreciation of special equipment		43,900			20,600			7,500			15,800
Salaries of product-line managers		116,200			40,800			39,000			36,400
Allocated common fixed expenses*		187,200			54,000			81,200			52,000
Total fixed expenses		416,500			123,800			168,200			124,500
Net operating income (loss)	$	49,500		$	34,200		$	34,800		$	(19,500)

*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