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	$	922,000		$	266,000		$	404,000		$	252,000
Variable manufacturing and selling expenses		477,000			118,000			200,000			159,000
Contribution margin		445,000			148,000			204,000			93,000
Fixed expenses:
Advertising, traceable		69,500			8,500			40,500			20,500
Depreciation of special equipment		43,300			20,200			7,700			15,400
Salaries of product-line managers		114,800			41,000			38,500			35,300
Allocated common fixed expenses*		184,400			53,200			80,800			50,400
Total fixed expenses		412,000			122,900			167,500			121,600
Net operating income (loss)	$	33,000		$	25,100		$	36,500		$	(28,600)

*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

1.

	Racing Bikes
Sales	$(252,000)
Variable manufacturing and selling expense	159,000
Contribution margin	(93,000)
Avoidable fixed expenses:
Advertising, traceable	20,500
Salaries of product line managers	35,300
Total avoidable fixed expenses	55,800
Financial advantage (disadvantage)	$(37,200)

2.

As per above results production and sale of racing bikes should not be discontinued.

3.

	Total	Dirt Bike	Mountain Bike	Racing Bike
Sales	$922,000	$266,000	$404,000	$252,000
Less: Variable manufacturing and selling expenses	477,000	118,000	200,000	159,000
Contribution margin	445,000	148,000	204,000	93,000
Less: Traceable fixed expenses:
Advertising, traceable	69,500	8,500	40,500	20,500
Depreciation of special equipment	43,300	20,200	7,700	15,400
Salaries of product line managers	114,800	41,000	38,500	35,300
Total traceable fixed expenses	227,600	69,700	86,700	71,200
Segment margin	217,400	78,300	117,300	21,800
Less: Common fixed expenses	184,400
Net operating income (loss)	$33,000