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	$	928,000		$	269,000		$	405,000		$	254,000
Variable manufacturing and selling expenses		467,000			118,000			195,000			154,000
Contribution margin		461,000			151,000			210,000			100,000
Fixed expenses:
Advertising, traceable		69,200			8,600			40,300			20,300
Depreciation of special equipment		43,100			20,200			7,200			15,700
Salaries of product-line managers		115,200			40,600			38,400			36,200
Allocated common fixed expenses*		185,600			53,800			81,000			50,800
Total fixed expenses		413,100			123,200			166,900			123,000
Net operating income (loss)	$	47,900		$	27,800		$	43,100		$	(23,000)

*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.

Contribution Margin foregone	$          100,000
Fixed Expenses saved
Advertising	$            20,300
Salaries of product line managers	$            36,200
Total Fixed Expenses saved	$            56,500
Financial Advantage (Disadvantage)	$          (43,500)

2. Racing bikes should not be discontinued

3.

	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	$        928,000	$       269,000	$        405,000	$    254,000
Variable manufacturing and selling expenses	$        467,000	$       118,000	$        195,000	$    154,000
Contribution margin	$        461,000	$       151,000	$        210,000	$    100,000
Traceable Fixed expenses
Advertising, traceable	$          69,200	$            8,600	$          40,300	$      20,300
Depreciation of special equipment	$          43,100	$         20,200	$            7,200	$      15,700
Salaries of product-line managers	$        115,200	$         40,600	$          38,400	$      36,200
Total Traceable Fixed expenses	$        227,500	$         69,400	$          85,900	$      72,200
Segment Margin	$        233,500	$         81,600	$        124,100	$      27,800
Common fixed expenses	$        185,600
Net operating income (loss)	$          47,900