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	$	930,000		$	269,000		$	403,000		$	258,000
Variable manufacturing and selling expenses		468,000			111,000			199,000			158,000
Contribution margin		462,000			158,000			204,000			100,000
Fixed expenses:
Advertising, traceable		69,100			8,100			40,300			20,700
Depreciation of special equipment		43,500			20,500			7,600			15,400
Salaries of product-line managers		115,800			40,100			39,000			36,700
Allocated common fixed expenses*		186,000			53,800			80,600			51,600
Total fixed expenses		414,400			122,500			167,500			124,400
Net operating income (loss)	$	47,600		$	35,500		$	36,500		$	(24,400)

*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