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	$	930,000		$	265,000		$	408,000		$	257,000
Variable manufacturing and selling expenses		465,000			118,000			192,000			155,000
Contribution margin		465,000			147,000			216,000			102,000
Fixed expenses:
Advertising, traceable		69,500			8,700			40,400			20,400
Depreciation of special equipment		43,100			20,300			7,700			15,100
Salaries of product-line managers		114,700			40,700			38,500			35,500
Allocated common fixed expenses*		186,000			53,000			81,600			51,400
Total fixed expenses		413,300			122,700			168,200			122,400
Net operating income (loss)	$	51,700		$	24,300		$	47,800		$	(20,400)

*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

Solution 1:

Solution 2:

Yes, the production and sale of racing bikes should not be discontinued.

Solution 3: