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	$	930,000		$	268,000		$	407,000		$	255,000
Variable manufacturing and selling expenses		479,000			120,000			204,000			155,000
Contribution margin		451,000			148,000			203,000			100,000
Fixed expenses:
Advertising, traceable		69,700			8,700			40,200			20,800
Depreciation of special equipment		43,300			21,000			7,100			15,200
Salaries of product-line managers		114,800			40,100			38,100			36,600
Allocated common fixed expenses*		186,000			53,600			81,400			51,000
Total fixed expenses		413,800			123,400			166,800			123,600
Net operating income (loss)	$	37,200		$	24,600		$	36,200		$	(23,600)

*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?

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