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 $ 406,000 $ 257,000 Variable manufacturing and selling expenses 471,000 116,000 204,000 151,000 Contribution margin 457,000 149,000 202,000 106,000 Fixed expenses: Advertising, traceable 70,200 8,800 40,500 20,900 Depreciation of special equipment 44,100 20,900 7,900 15,300 Salaries of product-line managers 114,800 40,200 38,100 36,500 Allocated common fixed expenses* 185,600 53,000 81,200 51,400 Total fixed expenses 414,700 122,900 167,700 124,100 Net operating income (loss) $ 42,300 $ 26,100 $ 34,300 $ (18,100) *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