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	$	921,000		$	266,000		$	401,000		$	254,000
Variable manufacturing and selling expenses		485,000			116,000			209,000			160,000
Contribution margin		436,000			150,000			192,000			94,000
Fixed expenses:
Advertising, traceable		69,900			8,900			40,600			20,400
Depreciation of special equipment		43,800			20,200			7,600			16,000
Salaries of product-line managers		114,900			40,700			38,800			35,400
Allocated common fixed expenses*		184,200			53,200			80,200			50,800
Total fixed expenses		412,800			123,000			167,200			122,600
Net operating income (loss)	$	23,200		$	27,000		$	24,800		$	(28,600)

*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	921000	667000	-254000
Variable manufacturing and selling expenses	485000	325000	160000
Contribution margin (loss)	436000	342000	-94000
Fixed expenses:
Advertising, traceable	69900	49500	20400
Depreciation on special equipment	43800	43800	0
Salaries of product manager	114900	79500	35400
Common allocated costs	184200	184200	0
Total fixed expenses	412800	357000	55800
Net operating income (loss)	23200	-15000	-38200
Financial (disadvantage) ($38200)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	266000	401000	254000
Variable manufacturing and selling expenses	485000	116000	209000	160000
Contribution margin (loss)	436000	150000	192000	94000
Traceable fixed expenses:
Advertising, traceable	69900	8900	40600	20400
Depreciation on special equipment	43800	20200	7600	16000
Salaries of product manager	114900	40700	38800	35400
Total traceable fixed expenses	228600	69800	87000	71800
Product line segment margin	207400	80200	105000	22200
Common fixed expenses	184200
Net operating income (loss)	23200