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	$	924,000		$	263,000		$	405,000		$	256,000
Variable manufacturing and selling expenses		472,000			112,000			208,000			152,000
Contribution margin		452,000			151,000			197,000			104,000
Fixed expenses:
Advertising, traceable		70,900			9,000			40,900			21,000
Depreciation of special equipment		44,200			20,200			8,000			16,000
Salaries of product-line managers		114,100			40,800			38,100			35,200
Allocated common fixed expenses*		184,800			52,600			81,000			51,200
Total fixed expenses		414,000			122,600			168,000			123,400
Net operating income (loss)	$	38,000		$	28,400		$	29,000		$	(19,400)

*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