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		$	267,000		$	403,000		$	255,000
Variable manufacturing and selling expenses		478,000			118,000			205,000			155,000
Contribution margin		447,000			149,000			198,000			100,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,600			20,500
Depreciation of special equipment		43,600			20,100			7,700			15,800
Salaries of product-line managers		114,900			40,100			38,600			36,200
Allocated common fixed expenses*		185,000			53,400			80,600			51,000
Total fixed expenses		413,100			122,100			167,500			123,500
Net operating income (loss)	$	33,900		$	26,900		$	30,500		$	(23,500)

*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	925000	670000	-255000
Variable manufacturing and selling expenses	478000	323000	155000
Contribution margin (loss)	447000	347000	-100000
Fixed expenses:
Advertising, traceable	69600	49100	20500
Depreciation on special equipment	43600	43600	0
Salaries of product manager	114900	78700	36200
Common allocated costs	185000	185000	0
Total fixed expenses	413100	356400	56700
Net operating income (loss)	33900	-9400	-43300
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	267000	403000	255000
Variable manufacturing and selling expenses	478000	118000	205000	155000
Contribution margin (loss)	447000	149000	198000	100000
Traceable fixed expenses:
Advertising, traceable	69600	8500	40600	20500
Depreciation on special equipment	43600	20100	7700	15800
Salaries of product manager	114900	40100	38600	36200
Total traceable fixed expenses	228100	68700	86900	72500
Product line segment margin	218900	80300	111100	27500
Common fixed expenses	185000
Net operating income (loss)	33900