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	$	924,000		$	264,000		$	406,000		$	254,000
Variable manufacturing and selling expenses		466,000			118,000			194,000			154,000
Contribution margin		458,000			146,000			212,000			100,000
Fixed expenses:
Advertising, traceable		70,600			8,700			40,900			21,000
Depreciation of special equipment		43,500			20,300			7,600			15,600
Salaries of product-line managers		116,000			40,900			38,300			36,800
Allocated common fixed expenses*		184,800			52,800			81,200			50,800
Total fixed expenses		414,900			122,700			168,000			124,200
Net operating income (loss)	$	43,100		$	23,300		$	44,000		$	(24,200)

*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.

Answer 1