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		$	267,000		$	401,000		$	260,000
Variable manufacturing and selling expenses		458,000			113,000			193,000			152,000
Contribution margin		470,000			154,000			208,000			108,000
Fixed expenses:
Advertising, traceable		70,000			8,700			40,900			20,400
Depreciation of special equipment		43,100			20,800			7,200			15,100
Salaries of product-line managers		114,800			40,800			38,900			35,100
Allocated common fixed expenses*		185,600			53,400			80,200			52,000
Total fixed expenses		413,500			123,700			167,200			122,600
Net operating income (loss)	$	56,500		$	30,300		$	40,800		$	(14,600)

*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. Should the production and sale of racing bikes be discontinued?

2.  What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?.
   

Answer 1

Solutions:

Discontinuing the production and sale of racing bikes would adversely affect the profitability of the company as a whole. The Overall profit of the company will be reduced to $4000 from the current $56500. The fixed costs will be distributed between Dirt and Mountain bikes based on sales dollar, thereby increasing the cost and affecting their profitability. Also the Depreciation of the special equipment of $15100 used for Racing bikes stays on and is an added expense to the company. So, it is advisable for the company to continue with the production and sale of racing bikes.

Working to support the argument

	Total		Dirt Bikes		Mountain Bikes		Racing Biles
Sales	6,68,000	$	2,67,000	$	4,01,000	$
Variable manufacturing and selling expenses	3,06,000		1,13,000		1,93,000
Contribution margin	3,62,000		1,54,000		2,08,000		0
Fixed expenses:
Advertising, traceable	49,600		8,700		40,900
Depreciation of special equipment	43,100		20,800		7,200		15,100
Salaries of product-line managers	79,700		40,800		38,900
Allocated common fixed expenses*	1,85,600		74,184		1,11,416
Total fixed expenses	3,58,000		1,44,484		1,98,416		15,100
Net operating income (loss)	4,000	$	9,516	$	9,584	$	-15,100

Answer 2

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	928000	668000	-260000
Variable manufacturing and selling expenses	458000	306000	152000
Contribution margin (loss)	470000	362000	-108000
Fixed expenses:
Advertising, traceable	70000	49600	20400
Depreciation on special equipment	43100	43100	0
Salaries of product manager	114800	79700	35100
Common allocated costs	185600	185600	0
Total fixed expenses	413500	358000	55500
Net operating income (loss)	56500	4000	-52500
Financial (disadvantage) per quarter $(52500)