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	$	926,000		$	264,000		$	405,000		$	257,000
Variable manufacturing and selling expenses		466,000			119,000			197,000			150,000
Contribution margin		460,000			145,000			208,000			107,000
Fixed expenses:
Advertising, traceable		69,200			8,300			40,700			20,200
Depreciation of special equipment		43,800			20,500			7,500			15,800
Salaries of product-line managers		114,700			40,900			38,500			35,300
Allocated common fixed expenses*		185,200			52,800			81,000			51,400
Total fixed expenses		412,900			122,500			167,700			122,700
Net operating income (loss)	$	47,100		$	22,500		$	40,300		$	(15,700)

*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

			Current total	total if racing bikes are dropped	Defference
sales			926000	669000	-257000
variable cost			466000	316000	150000
contribution			460000	353000	-107000
Fixed expenses
advertising ,traceable			69200	49000	20200
depreciation			43800	43800	0
salaries			114700	79400	35300
allocated cost			185200	185200	0
Total fixed expenses			412900	357400	55500
net operating income			47100	-4400	-51500
net operating income decrease by 51500 if bike racing discontinued
2) production & sale of racing bike should not be discontinued
3)			total	Dirt bikes	mountain bikes	racing bike
sales			926000	264000	405000	257000
variable manufacturing & selling exp			466000	119000	197000	150000
contribution margin			460000	145000	208000	107000
traceable fixed expenses
advertising			69200	8300	40700	20200
depreciation on special equipment			43800	20500	7500	15800
salary of product manager			114700	40900	38500	35300
total traceable fixed expenses			227700	69700	86700	71300
product line segment margin			232300	75300	121300	35700
common fixed expensess			185200
net operating income (loss)			47100

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