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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: Dirt Mountain Racing Total Bikes Bikes Bikes $ 925,000 $262,000 $ 408,000 $ 255,000 471,000 118,000 200,000 153,000 454,000 144,000 208,000 102,000 Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) 69,000 8,500 40,200 20,300 43,400 20, 300 7,300 15,800 115,100 40,100 38,400 36,600 185,000 52,400 81,600 51,000 412,500 121,300 167,500 123,700 $ 41,500 $ 22,700 $ 40,500 $(21,700) *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

1
	Current Total	Total If Racing Bikes Are Dropped	Difference: Net Operating Income
Sales	925000	670000	-255000
Variable manufacturing and selling expenses	471000	318000	153000
Contribution margin (loss)	454000	352000	-102000
Fixed expenses:
Advertising, traceable	69000	48700	20300
Depreciation on special equipment	43400	43400	0
Salaries of product manager	115100	78500	36600
Common allocated costs	185000	185000	0
Total fixed expenses	412500	355600	56900
Net operating income (loss)	41500	-3600	-45100
Financial (disadvantage) $(45100)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	925000	262000	408000	255000
Variable manufacturing and selling expenses	471000	118000	200000	153000
Contribution margin (loss)	454000	144000	208000	102000
Traceable fixed expenses:
Advertising, traceable	69000	8500	40200	20300
Depreciation on special equipment	43400	20300	7300	15800
Salaries of product manager	115100	40100	38400	36600
Total traceable fixed expenses	227500	68900	85900	72700
Product line segment margin	226500	75100	122100	29300
Common fixed expenses	185000
Net operating income (loss)	41500