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 $ 267,000 $ 406,000 $ 251,000 Variable manufacturing and selling expenses 459,000 116,000 190,000 153,000 Contribution margin 465,000 151,000 216,000 98,000 Fixed expenses: Advertising, traceable 69,900 8,700 40,200 21,000 Depreciation of special equipment 43,700 20,400 7,400 15,900 Salaries of product-line managers 116,100 40,800 38,500 36,800 Allocated common fixed expenses* 184,800 53,400 81,200 50,200 Total fixed expenses 414,500 123,300 167,300 123,900 Net operating income (loss) $ 50,500 $ 27,700 $ 48,700 $ (25,900) *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