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	$	922,000		$	267,000		$	401,000		$	254,000
Variable manufacturing and selling expenses		463,000			116,000			194,000			153,000
Contribution margin		459,000			151,000			207,000			101,000
Fixed expenses:
Advertising, traceable		69,900			8,600			40,800			20,500
Depreciation of special equipment		43,900			20,400			7,900			15,600
Salaries of product-line managers		115,400			40,400			39,000			36,000
Allocated common fixed expenses*		184,400			53,400			80,200			50,800
Total fixed expenses		413,600			122,800			167,900			122,900
Net operating income (loss)	$	45,400		$	28,200		$	39,100		$	(21,900)

*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	922000	668000	-254000
Variable manufacturing and selling expenses	463000	310000	153000
Contribution margin (loss)	459000	358000	-101000
Fixed expenses:
Advertising, traceable	69900	49400	20500
Depreciation on special equipment	43900	43900	0
Salaries of product manager	115400	79400	36000
Common allocated costs	184400	184400	0
Total fixed expenses	413600	357100	56500
Net operating income (loss)	45400	900	-44500
Financial (disadvantage) ($44500)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	922000	267000	401000	254000
Variable manufacturing and selling expenses	463000	116000	194000	153000
Contribution margin (loss)	459000	151000	207000	101000
Traceable fixed expenses:
Advertising, traceable	69900	8600	40800	20500
Depreciation on special equipment	43900	20400	7900	15600
Salaries of product manager	115400	40400	39000	36000
Total traceable fixed expenses	229200	69400	87700	72100
Product line segment margin	229800	81600	119300	28900
Common fixed expenses	184400
Net operating income (loss)	45400