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		$	262,000		$	404,000		$	258,000
Variable manufacturing and selling expenses		476,000			118,000			207,000			151,000
Contribution margin		448,000			144,000			197,000			107,000
Fixed expenses:
Advertising, traceable		69,800			8,700			40,800			20,300
Depreciation of special equipment		44,300			20,700			8,000			15,600
Salaries of product-line managers		115,800			40,700			39,000			36,100
Allocated common fixed expenses*		184,800			52,400			80,800			51,600
Total fixed expenses		414,700			122,500			168,600			123,600
Net operating income (loss)	$	33,300		$	21,500		$	28,400		$	(16,600)

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	924000	666000	-258000
Variable manufacturing and selling expenses	476000	325000	151000
Contribution margin (loss)	448000	341000	-107000
Fixed expenses:
Advertising, traceable	69800	49500	20300
Depreciation on special equipment	44300	44300	0
Salaries of product manager	115800	79700	36100
Common allocated costs	184800	184800	0
Total fixed expenses	414700	358300	56400
Net operating income (loss)	33300	-17300	-50600
Financial (disadvantage) $(50600)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	924000	262000	404000	258000
Variable manufacturing and selling expenses	476000	118000	207000	151000
Contribution margin (loss)	448000	144000	197000	107000
Traceable fixed expenses:
Advertising, traceable	69800	8700	40800	20300
Depreciation on special equipment	44300	20700	8000	15600
Salaries of product manager	115800	40700	39000	36100
Total traceable fixed expenses	229900	70100	87800	72000
Product line segment margin	218100	73900	109200	35000
Common fixed expenses	184800
Net operating income (loss)	33300