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	$	919,000		$	262,000		$	405,000		$	252,000
Variable manufacturing and selling expenses		462,000			111,000			200,000			151,000
Contribution margin		457,000			151,000			205,000			101,000
Fixed expenses:
Advertising, traceable		69,300			8,900			40,100			20,300
Depreciation of special equipment		43,700			20,400			7,800			15,500
Salaries of product-line managers		114,300			40,000			39,000			35,300
Allocated common fixed expenses*		183,800			52,400			81,000			50,400
Total fixed expenses		411,100			121,700			167,900			121,500
Net operating income (loss)	$	45,900		$	29,300		$	37,100		$	(20,500)

*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 advantage (disadvantage) per quarter: $-45400

	Current Total	Total If Racing Bikes Are Dropped	Difference: Financial advantage (disadvantage)
Sales	919000	667000	-252000
Variable manufacturing and selling expenses	462000	311000	151000
Contribution margin (loss)	457000	356000	-101000
Fixed expenses:
Advertising, traceable	69300	49000	20300
Depreciation on special equipment	43700	43700	0
Salaries of product-line managers	114300	79000	35300
Allocated common fixed expenses	183800	183800	0
Total fixed expenses	411100	355500	55600
Net operating income (loss)	45900	500	-45400

2. No.

The production and sale of racing bikes should not be discontinued as it will result in a financial disadvantage.

3.

Segmented Income Statement
	Totals	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	919000	262000	405000	252000
Variable manufacturing and selling expenses	462000	111000	200000	151000
Contribution margin (loss)	457000	151000	205000	101000
Traceable fixed expenses:
Advertising	69300	8900	40100	20300
Depreciation on special equipment	43700	20400	7800	15500
Salaries of product-line managers	114300	40000	39000	35300
Total traceable fixed expenses	227300	69300	86900	71100
Segment operating income	229700	81700	118100	29900
Common fixed expenses	183800
Net operating income (loss) $	45900