Question

he 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	$	928,000		$	268,000		$	401,000		$	259,000
Variable manufacturing and selling expenses		467,000			113,000			203,000			151,000
Contribution margin		461,000			155,000			198,000			108,000
Fixed expenses:
Advertising, traceable		69,600			8,500			40,700			20,400
Depreciation of special equipment		43,200			20,500			7,400			15,300
Salaries of product-line managers		115,800			40,600			38,700			36,500
Allocated common fixed expenses*		185,600			53,600			80,200			51,800
Total fixed expenses		414,200			123,200			167,000			124,000
Net operating income (loss)	$	46,800		$	31,800		$	31,000		$	(16,000)

*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	928000	669000	-259000
Variable manufacturing and selling expenses	467000	316000	151000
Contribution margin (loss)	461000	353000	-108000
Fixed expenses:
Advertising, traceable	69600	49200	20400
Depreciation on special equipment	43200	43200	0
Salaries of product manager	115800	79300	36500
Common allocated costs	185600	185600	0
Total fixed expenses	414200	357300	56900
Net operating income (loss)	46800	-4300	-51100
Financial (disadvantage) $(51100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	928000	268000	401000	259000
Variable manufacturing and selling expenses	467000	113000	203000	151000
Contribution margin (loss)	461000	155000	198000	108000
Traceable fixed expenses:
Advertising, traceable	69600	8500	40700	20400
Depreciation on special equipment	43200	20500	7400	15300
Salaries of product manager	115800	40600	38700	36500
Total traceable fixed expenses	228600	69600	86800	72200
Product line segment margin	232400	85400	111200	35800
Common fixed expenses	185600
Net operating income (loss)	46800