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	$	918,000		$	262,000		$	404,000		$	252,000
Variable manufacturing and selling expenses		458,000			110,000			195,000			153,000
Contribution margin		460,000			152,000			209,000			99,000
Fixed expenses:
Advertising, traceable		70,300			8,700			40,900			20,700
Depreciation of special equipment		44,000			20,500			7,600			15,900
Salaries of product-line managers		115,100			40,600			38,300			36,200
Allocated common fixed expenses*		183,600			52,400			80,800			50,400
Total fixed expenses		413,000			122,200			167,600			123,200
Net operating income (loss)	$	47,000		$	29,800		$	41,400		$	(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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	918000	666000	-252000
Variable manufacturing and selling expenses	458000	305000	153000
Contribution margin (loss)	460000	361000	-99000
Fixed expenses:
Advertising, traceable	70300	49600	20700
Depreciation on special equipment	44000	44000	0
Salaries of product manager	115100	78900	36200
Common allocated costs	183600	183600	0
Total fixed expenses	413000	356100	56900
Net operating income (loss)	47000	4900	-42100
Financial (disadvantage) $(42100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	918000	262000	404000	252000
Variable manufacturing and selling expenses	458000	110000	195000	153000
Contribution margin (loss)	460000	152000	209000	99000
Traceable fixed expenses:
Advertising, traceable	70300	8700	40900	20700
Depreciation on special equipment	44000	20500	7600	15900
Salaries of product manager	115100	40600	38300	36200
Total traceable fixed expenses	229400	69800	86800	72800
Product line segment margin	230600	82200	122200	26200
Common fixed expenses	183600
Net operating income (loss)	47000