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	$	919,000		$	265,000		$	404,000		$	250,000
Variable manufacturing and selling expenses		473,000			119,000			197,000			157,000
Contribution margin		446,000			146,000			207,000			93,000
Fixed expenses:
Advertising, traceable		70,400			8,700			40,800			20,900
Depreciation of special equipment		44,300			20,400			8,000			15,900
Salaries of product-line managers		114,500			40,200			38,500			35,800
Allocated common fixed expenses*		183,800			53,000			80,800			50,000
Total fixed expenses		413,000			122,300			168,100			122,600
Net operating income (loss)	$	33,000		$	23,700		$	38,900		$	(29,600)

*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