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	$	920,000		$	269,000		$	400,000		$	251,000
Variable manufacturing and selling expenses		464,000			114,000			198,000			152,000
Contribution margin		456,000			155,000			202,000			99,000
Fixed expenses:
Advertising, traceable		69,700			8,800			40,200			20,700
Depreciation of special equipment		43,900			20,400			8,000			15,500
Salaries of product-line managers		114,100			40,100			38,600			35,400
Allocated common fixed expenses*		184,000			53,800			80,000			50,200
Total fixed expenses		411,700			123,100			166,800			121,800
Net operating income (loss)	$	44,300		$	31,900		$	35,200		$	(22,800)

*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.

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	920000	669000	-251000
Variable manufacturing and selling expenses	464000	312000	152000
Contribution margin (loss)	456000	357000	-99000
Fixed expenses:
Advertising, traceable	69700	49000	20700
Depreciation on special equipment	43900	43900	0
Salaries of product manager	114100	78700	35400
Common allocated costs	184000	184000	0
Total fixed expenses	411700	355600	56100
Net operating income (loss)	44300	1400	-42900
Financial (disadvantage) $(42900)
2
No, production and sale of racing bikes should not be discontinued
3
	Total	Dirt Bikes	Mountain Bikes	Racing Bikes
Sales	920000	269000	400000	251000
Variable manufacturing and selling expenses	464000	114000	198000	152000
Contribution margin (loss)	456000	155000	202000	99000
Traceable fixed expenses:
Advertising, traceable	69700	8800	40200	20700
Depreciation on special equipment	43900	20400	8000	15500
Salaries of product manager	114100	40100	38600	35400
Total traceable fixed expenses	227700	69300	86800	71600
Product line segment margin	228300	85700	115200	27400
Common fixed expenses	184000
Net operating income (loss)	44300