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		$	270,000		$	402,000		$	256,000
Variable manufacturing and selling expenses		478,000			116,000			208,000			154,000
Contribution margin		450,000			154,000			194,000			102,000
Fixed expenses:
Advertising, traceable		69,300			8,300			40,800			20,200
Depreciation of special equipment		42,900			20,300			7,500			15,100
Salaries of product-line managers		115,400			40,200			38,400			36,800
Allocated common fixed expenses*		185,600			54,000			80,400			51,200
Total fixed expenses		413,200			122,800			167,100			123,300
Net operating income (loss)	$	36,800		$	31,200		$	26,900		$	(21,300)

*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)	Financial Disadvantage	(45,000)
	Current net operating income	36,800
	Less: Loss of Contribution margin by dropping Racing Bikes segment	(102,000)
	Add: Saving in traceable fixed cost belongs to racing bike segment	57,000	(20200+36800)
	Total income of The Regal Cycle company after dropping racing bike segment	(8,200)
	Financial Disadvantage	(45,000)
2)	No, production and sale of racing bikes should not be discontinued
3)		Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
	Sales	928,000	270,000	402,000	256,000
	Variable manufacturing and selling Expenses	478,000	116,000	208,000	154,000
	Contribution Margin	450,000	154,000	194,000	102,000
	Traceable Fixed Expenses:
	Advertising, Traceable	69,300	8,300	40,800	20,200
	Depreciation of Special Equipments	42,900	20,300	7,500	15,100
	Saalries of Product Line Workers	115,400	40,200	38,400	36,800
	Total Traceable fixed expense	227,600	68,800	86,700	12,000
	Product Line Segment Margin/(Loss)	222,400	85,200	107,300	90,000
	Common Fixed cost	185,600
	Net Operating Income / (Loss)	36,800