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	$	917,000		$	262,000		$	402,000		$	253,000
Variable manufacturing and selling expenses		474,000			115,000			206,000			153,000
Contribution margin		443,000			147,000			196,000			100,000
Fixed expenses:
Advertising, traceable		70,200			8,500			40,900			20,800
Depreciation of special equipment		44,500			20,900			7,900			15,700
Salaries of product-line managers		115,200			40,800			38,200			36,200
Allocated common fixed expenses*		183,400			52,400			80,400			50,600
Total fixed expenses		413,300			122,600			167,400			123,300
Net operating income (loss)	$	29,700		$	24,400		$	28,600		$	(23,300)

*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

1a
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	917000	664000	-253000
Variable manufacturing and selling expenses	474000	321000	153000
Contribution margin (loss)	443000	343000	-100000
Fixed expenses:
Advertising, traceable	70200	49400	20800
Depreciation on special equipment	44500	44500	0
Salaries of product manager	115200	79000	36200
Common allocated costs	183400	183400	0
Total fixed expenses	413300	356300	57000
Net operating income (loss)	29700	-13300	-43000
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	917000	262000	402000	253000
Variable manufacturing and selling expenses	474000	115000	206000	153000
Contribution margin (loss)	443000	147000	196000	100000
Traceable fixed expenses:
Advertising, traceable	70200	8500	40900	20800
Depreciation on special equipment	44500	20900	7900	15700
Salaries of product manager	115200	40800	38200	36200
Total traceable fixed expenses	229900	70200	87000	72700
Product line segment margin	213100	76800	109000	27300
Common fixed expenses	183400
Net operating income (loss)	29700