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	$	921,000		$	266,000		$	403,000		$	252,000
Variable manufacturing and selling expenses		472,000			116,000			202,000			154,000
Contribution margin		449,000			150,000			201,000			98,000
Fixed expenses:
Advertising, traceable		69,900			8,700			40,400			20,800
Depreciation of special equipment		43,800			20,900			7,300			15,600
Salaries of product-line managers		114,600			41,000			38,300			35,300
Allocated common fixed expenses*		184,200			53,200			80,600			50,400
Total fixed expenses		412,500			123,800			166,600			122,100
Net operating income (loss)	$	36,500		$	26,200		$	34,400		$	(24,100)

*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: Net Operating Income
Sales	921000	669000	-252000
Variable manufacturing and selling expenses	472000	318000	154000
Contribution margin (loss)	449000	351000	-98000
Fixed expenses:
Advertising, traceable	69900	49100	20800
Depreciation on special equipment	43800	43800	0
Salaries of product manager	114600	79300	35300
Common allocated costs	184200	184200	0
Total fixed expenses	412500	356400	56100
Net operating income (loss)	36500	-5400	-41900
Financial (disadvantage) $(41900)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	266000	403000	252000
Variable manufacturing and selling expenses	472000	116000	202000	154000
Contribution margin (loss)	449000	150000	201000	98000
Traceable fixed expenses:
Advertising, traceable	69900	8700	40400	20800
Depreciation on special equipment	43800	20900	7300	15600
Salaries of product manager	114600	41000	38300	35300
Total traceable fixed expenses	228300	70600	86000	71700
Product line segment margin	220700	79400	115000	26300
Common fixed expenses	184200
Net operating income (loss)	36500