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	$	929,000		$	266,000		$	404,000		$	259,000
Variable manufacturing and selling expenses		471,000			117,000			197,000			157,000
Contribution margin		458,000			149,000			207,000			102,000
Fixed expenses:
Advertising, traceable		69,400			8,500			40,700			20,200
Depreciation of special equipment		43,100			20,100			7,300			15,700
Salaries of product-line managers		114,400			40,100			38,800			35,500
Allocated common fixed expenses*		185,800			53,200			80,800			51,800
Total fixed expenses		412,700			121,900			167,600			123,200
Net operating income (loss)	$	45,300		$	27,100		$	39,400		$	(21,200)

*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