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		$	268,000		$	403,000		$	251,000
Variable manufacturing and selling expenses		468,000			118,000			200,000			150,000
Contribution margin		454,000			150,000			203,000			101,000
Fixed expenses:
Advertising, traceable		69,600			8,200			40,900			20,500
Depreciation of special equipment		43,200			20,400			7,200			15,600
Salaries of product-line managers		114,400			40,600			38,500			35,300
Allocated common fixed expenses*		184,400			53,600			80,600			50,200
Total fixed expenses		411,600			122,800			167,200			121,600
Net operating income (loss)	$	42,400		$	27,200		$	35,800		$	(20,600)

*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?

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