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	$	923,000		$	262,000		$	403,000		$	258,000
Variable manufacturing and selling expenses		463,000			115,000			194,000			154,000
Contribution margin		460,000			147,000			209,000			104,000
Fixed expenses:
Advertising, traceable		69,800			8,600			41,000			20,200
Depreciation of special equipment		44,400			20,700			7,800			15,900
Salaries of product-line managers		115,800			41,000			38,300			36,500
Allocated common fixed expenses*		184,600			52,400			80,600			51,600
Total fixed expenses		414,600			122,700			167,700			124,200
Net operating income (loss)	$	45,400		$	24,300		$	41,300		$	(20,200)

*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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	923000	665000	-258000
Variable manufacturing and selling expenses	463000	309000	154000
Contribution margin (loss)	460000	356000	-104000
Fixed expenses:
Advertising, traceable	69800	49600	20200
Depreciation on special equipment	44400	44400	0
Salaries of product manager	115800	79300	36500
Common allocated costs	184600	184600	0
Total fixed expenses	414600	357900	56700
Net operating income (loss)	45400	-1900	-47300
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	923000	262000	403000	258000
Variable manufacturing and selling expenses	463000	115000	194000	154000
Contribution margin (loss)	460000	147000	209000	104000
Traceable fixed expenses:
Advertising, traceable	69800	8600	41000	20200
Depreciation on special equipment	44400	20700	7800	15900
Salaries of product manager	115800	41000	38300	36500
Total traceable fixed expenses	230000	70300	87100	72600
Product line segment margin	230000	76700	121900	31400
Common fixed expenses	184600
Net operating income (loss)	45400