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	$	924,000		$	264,000		$	410,000		$	250,000
Variable manufacturing and selling expenses		469,000			114,000			196,000			159,000
Contribution margin		455,000			150,000			214,000			91,000
Fixed expenses:
Advertising, traceable		70,000			8,600			40,600			20,800
Depreciation of special equipment		44,300			21,000			7,700			15,600
Salaries of product-line managers		114,700			40,100			38,300			36,300
Allocated common fixed expenses*		184,800			52,800			82,000			50,000
Total fixed expenses		413,800			122,500			168,600			122,700
Net operating income (loss)	$	41,200		$	27,500		$	45,400		$	(31,700)

*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