Question

Exercise 13-2 (Static) Dropping or Retaining a Segment [LO13-2]

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	$	300,000		$	90,000		$	150,000		$	60,000
Variable manufacturing and selling expenses		120,000			27,000			60,000			33,000
Contribution margin		180,000			63,000			90,000			27,000
Fixed expenses:
Advertising, traceable		30,000			10,000			14,000			6,000
Depreciation of special equipment		23,000			6,000			9,000			8,000
Salaries of product-line managers		35,000			12,000			13,000			10,000
Allocated common fixed expenses*		60,000			18,000			30,000			12,000
Total fixed expenses		148,000			46,000			66,000			36,000
Net operating income (loss)	$	32,000		$	17,000		$	24,000		$	(9,000	)

*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

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