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 $ 925,000 $ 261,000 $ 405,000 $ 259,000 Variable manufacturing and selling expenses 478,000 117,000 204,000 157,000 Contribution margin 447,000 144,000 201,000 102,000 Fixed expenses: Advertising, traceable 69,000 8,500 40,200 20,300 Depreciation of special equipment 43,700 20,400 7,900 15,400 Salaries of product-line managers 115,300 40,900 38,600 35,800 Allocated common fixed expenses* 185,000 52,200 81,000 51,800 Total fixed expenses 413,000 122,000 167,700 123,300 Net operating income (loss) $ 34,000 $ 22,000 $ 33,300 $ (21,300) *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