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	$	925,000		$	264,000		$	406,000		$	255,000
Variable manufacturing and selling expenses		460,000			118,000			190,000			152,000
Contribution margin		465,000			146,000			216,000			103,000
Fixed expenses:
Advertising, traceable		69,900			8,700			40,300			20,900
Depreciation of special equipment		44,100			20,800			7,700			15,600
Salaries of product-line managers		115,400			40,800			38,200			36,400
Allocated common fixed expenses*		185,000			52,800			81,200			51,000
Total fixed expenses		414,400			123,100			167,400			123,900
Net operating income (loss)	$	50,600		$	22,900		$	48,600		$	(20,900)

*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	925000	670000	-255000
Variable manufacturing and selling expenses	460000	308000	152000
Contribution margin (loss)	465000	362000	-103000
Fixed expenses:
Advertising, traceable	69900	49000	20900
Depreciation on special equipment	44100	44100	0
Salaries of product manager	115400	79000	36400
Common allocated costs	185000	185000	0
Total fixed expenses	414400	357100	57300
Net operating income (loss)	50600	4900	-45700
Financial (disadvantage) $(45700)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	264000	406000	255000
Variable manufacturing and selling expenses	460000	118000	190000	152000
Contribution margin (loss)	465000	146000	216000	103000
Traceable fixed expenses:
Advertising, traceable	69900	8700	40300	20900
Depreciation on special equipment	44100	20800	7700	15600
Salaries of product manager	115400	40800	38200	36400
Total traceable fixed expenses	229400	70300	86200	72900
Product line segment margin	235600	75700	129800	30100
Common fixed expenses	185000
Net operating income (loss)	50600