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		$	269,000		$	402,000		$	251,000
Variable manufacturing and selling expenses		469,000			117,000			198,000			154,000
Contribution margin		453,000			152,000			204,000			97,000
Fixed expenses:
Advertising, traceable		70,200			8,600			40,800			20,800
Depreciation of special equipment		43,700			20,700			7,300			15,700
Salaries of product-line managers		116,000			40,400			38,600			37,000
Allocated common fixed expenses*		184,400			53,800			80,400			50,200
Total fixed expenses		414,300			123,500			167,100			123,700
Net operating income (loss)	$	38,700		$	28,500		$	36,900		$	(26,700)

*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