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	$	933,000		$	267,000		$	406,000		$	260,000
Variable manufacturing and selling expenses		466,000			115,000			198,000			153,000
Contribution margin		467,000			152,000			208,000			107,000
Fixed expenses:
Advertising, traceable		70,000			8,800			40,700			20,500
Depreciation of special equipment		43,300			20,900			7,200			15,200
Salaries of product-line managers		115,400			40,800			38,100			36,500
Allocated common fixed expenses*		186,600			53,400			81,200			52,000
Total fixed expenses		415,300			123,900			167,200			124,200
Net operating income (loss)	$	51,700		$	28,100		$	40,800		$	(17,200)

*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.

What is the financial advantage (disadvantage) per quarter of discontinuing the racing bikes?

Should the production and sale of racing bikes be discontinued? Yes or No

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.

	Totals Dirt Bikes Mountain Bikes Racing Bikes Contribution margin (loss) Traceable fixed expenses: Total traceable fixed expenses Product line segment margin (loss) Net operating income (loss)

Answer 1