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	$	916,000		$	262,000		$	401,000		$	253,000
Variable manufacturing and selling expenses		476,000			113,000			204,000			159,000
Contribution margin		440,000			149,000			197,000			94,000
Fixed expenses:
Advertising, traceable		69,700			8,400			40,500			20,800
Depreciation of special equipment		44,100			20,700			7,700			15,700
Salaries of product-line managers		115,600			40,600			38,500			36,500
Allocated common fixed expenses*		183,200			52,400			80,200			50,600
Total fixed expenses		412,600			122,100			166,900			123,600
Net operating income (loss)	$	27,400		$	26,900		$	30,100		$	(29,600)

*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

			Current total	total if racing bikes are dropped	Defference
sales			916000	663000	-253000
variable cost			476000	317000	159000
contribution			440000	346000	-94000
Fixed expenses
advertising ,traceable			69700	48900	20800
depreciation			44100	44100	0
salaries			115600	79100	36500
allocated cost			183200	183200	0
Total fixed expenses			412600	355300	57300
net operating income			27400	-9300	-36700
net operating income decrease by 36700 if bike racing discontinued
2) production & sale of racing bike should not be discontinued
3)			total	Dirt bikes	mountain bikes	racing bike
sales			916000	262000	401000	253000
variable manufacturing & selling exp			476000	113000	204000	159000
contribution margin			440000	149000	197000	94000
traceable fixed expenses
advertising			69700	8400	40500	20800
depreciation on special equipment			44100	20700	7700	15700
salary of product manager			115600	40600	38500	36500
total traceable fixed expenses			229400	69700	86700	73000
product line segment margin			210600	79300	110300	21000
common fixed expensess			183200
net operating income (loss)			27400