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	$	932,000		$	269,000		$	404,000		$	259,000
Variable manufacturing and selling expenses		475,000			112,000			207,000			156,000
Contribution margin		457,000			157,000			197,000			103,000
Fixed expenses:
Advertising, traceable		69,600			8,800			40,300			20,500
Depreciation of special equipment		43,700			20,500			7,800			15,400
Salaries of product-line managers		114,000			40,500			38,500			35,000
Allocated common fixed expenses*		186,400			53,800			80,800			51,800
Total fixed expenses		413,700			123,600			167,400			122,700
Net operating income (loss)	$	43,300		$	33,400		$	29,600		$	(19,700)

*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?

Answer 1