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	$	927,000		$	269,000		$	407,000		$	251,000
Variable manufacturing and selling expenses		479,000			111,000			210,000			158,000
Contribution margin		448,000			158,000			197,000			93,000
Fixed expenses:
Advertising, traceable		69,300			8,700			40,100			20,500
Depreciation of special equipment		44,000			20,200			8,000			15,800
Salaries of product-line managers		116,800			40,900			38,900			37,000
Allocated common fixed expenses*		185,400			53,800			81,400			50,200
Total fixed expenses		415,500			123,600			168,400			123,500
Net operating income (loss)	$	32,500		$	34,400		$	28,600		$	(30,500)

*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