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	$	920,000		$	267,000		$	402,000		$	251,000
Variable manufacturing and selling expenses		458,000			110,000			196,000			152,000
Contribution margin		462,000			157,000			206,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,700			40,600			20,400
Depreciation of special equipment		43,500			20,400			7,300			15,800
Salaries of product-line managers		115,200			40,800			38,400			36,000
Allocated common fixed expenses*		184,000			53,400			80,400			50,200
Total fixed expenses		412,400			123,300			166,700			122,400
Net operating income (loss)	$	49,600		$	33,700		$	39,300		$	(23,400)

*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