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		$	267,000		$	400,000		$	258,000
Variable manufacturing and selling expenses		468,000			118,000			200,000			150,000
Contribution margin		457,000			149,000			200,000			108,000
Fixed expenses:
Advertising, traceable		69,700			8,200			40,600			20,900
Depreciation of special equipment		43,400			20,200			7,300			15,900
Salaries of product-line managers		113,500			40,000			38,300			35,200
Allocated common fixed expenses*		185,000			53,400			80,000			51,600
Total fixed expenses		411,600			121,800			166,200			123,600
Net operating income (loss)	$	45,400		$	27,200		$	33,800		$	(15,600)

*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.
Required 1 Required 2 Required 3 What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes? Required 1 Required 2 >

Answer 1

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	925000	667000	-258000
Variable manufacturing and selling expenses	468000	318000	150000
Contribution margin (loss)	457000	349000	-108000
Fixed expenses:
Advertising, traceable	69700	48800	20900
Depreciation on special equipment	43400	43400	0
Salaries of product manager	113500	78300	35200
Common allocated costs	185000	185000	0
Total fixed expenses	411600	355500	56100
Net operating income (loss)	45400	-6500	-51900
Financial (disadvantage) per quarter $(51900)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	267000	400000	258000
Variable manufacturing and selling expenses	468000	118000	200000	150000
Contribution margin (loss)	457000	149000	200000	108000
Traceable fixed expenses:
Advertising, traceable	69700	8200	40600	20900
Depreciation on special equipment	43400	20200	7300	15900
Salaries of product manager	113500	40000	38300	35200
Total traceable fixed expenses	226600	68400	86200	72000
Product line segment margin	230400	80600	113800	36000
Common fixed expenses	185000
Net operating income (loss)	45400