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	$	928,000		$	265,000		$	410,000		$	253,000
Variable manufacturing and selling expenses		463,000			118,000			191,000			154,000
Contribution margin		465,000			147,000			219,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,400			40,700			20,600
Depreciation of special equipment		44,100			20,400			7,700			16,000
Salaries of product-line managers		114,700			40,700			38,900			35,100
Allocated common fixed expenses*		185,600			53,000			82,000			50,600
Total fixed expenses		414,100			122,500			169,300			122,300
Net operating income (loss)	$	50,900		$	24,500		$	49,700		$	(23,300)

*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