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	$	921,000		$	264,000		$	405,000		$	252,000
Variable manufacturing and selling expenses		465,000			117,000			193,000			155,000
Contribution margin		456,000			147,000			212,000			97,000
Fixed expenses:
Advertising, traceable		69,700			8,600			40,700			20,400
Depreciation of special equipment		43,700			20,500			7,300			15,900
Salaries of product-line managers		115,300			40,300			38,100			36,900
Allocated common fixed expenses*		184,200			52,800			81,000			50,400
Total fixed expenses		412,900			122,200			167,100			123,600
Net operating income (loss)	$	43,100		$	24,800		$	44,900		$	(26,600)

*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?

2. Should the production and sale of racing bikes be discontinued?

Yes or NO

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.

	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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: NetOperatingIncome
Sales	921000	669000	-252000
Variable manufacturing and selling expenses	465000	310000	155000
Contribution margin (loss)	456000	359000	-97000
Fixed expenses:
Advertising, traceable	69700	49300	20400
Depreciation on special equipment	43700	43700	0
Salaries of product manager	115300	78400	36900
Common allocated costs	184200	184200	0
Total fixed expenses	412900	355600	57300
Net operating income (loss)	43100	3400	-39700
Financial (disadvantage) ($39700)
2
No
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	921000	264000	405000	252000
Variable manufacturing and selling expenses	465000	117000	193000	155000
Contribution margin (loss)	456000	147000	212000	97000
Traceable fixed expenses:
Advertising, traceable	69700	8600	40700	20400
Depreciation on special equipment	43700	20500	7300	15900
Salaries of product manager	115300	40300	38100	36900
Total traceable fixed expenses	228700	69400	86100	73200
Product line segment margin	227300	77600	125900	23800
Common fixed expenses	184200
Net operating income (loss)	43100