Question

	Total			Dirt Bikes			Mountain Bikes			Racing Bikes
Sales	$	923,000		$	267,000		$	401,000		$	255,000
Variable manufacturing and selling expenses		470,000			117,000			203,000			150,000
Contribution margin		453,000			150,000			198,000			105,000
Fixed expenses:
Advertising, traceable		69,800			8,600			40,500			20,700
Depreciation of special equipment		43,400			20,200			7,500			15,700
Salaries of product-line managers		114,800			40,000			38,700			36,100
Allocated common fixed expenses*		184,600			53,400			80,200			51,000
Total fixed expenses		412,600			122,200			166,900			123,500
Net operating income (loss)	$	40,400		$	27,800		$	31,100		$	(18,500)

*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	668000	-255000
Variable manufacturing and selling expenses	470000	320000	150000
Contribution margin (loss)	453000	348000	-105000
Fixed expenses:
Advertising, traceable	69800	49100	20700
Depreciation on special equipment	43400	43400	0
Salaries of product manager	114800	78700	36100
Common allocated costs	184600	184600	0
Total fixed expenses	412600	355800	56800
Net operating income (loss)	40400	-7800	-48200
Financial (disadvantage) ($48200)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	923000	267000	401000	255000
Variable manufacturing and selling expenses	470000	117000	203000	150000
Contribution margin (loss)	453000	150000	198000	105000
Traceable fixed expenses:
Advertising, traceable	69800	8600	40500	20700
Depreciation on special equipment	43400	20200	7500	15700
Salaries of product manager	114800	40000	38700	36100
Total traceable fixed expenses	228000	68800	86700	72500
Product line segment margin	225000	81200	111300	32500
Common fixed expenses	184600
Net operating income (loss)	40400