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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 $90,000 $150,000 $60,000
Variable manufacturing
and selling expenses . . . . . . . . . . . . . . . . . . . 120,000 27,000 60,000 33,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . . 180,000 63,000 90,000 27,000
Fixed expenses:
Advertising, traceable………………. 30,000 10,000 14,000 6,000
Depreciation of special equipment ……. 23,000 6,000 9,000 8,000
Salaries of product-line managers . . . . . . . . 35,000 12,000 13,000 10,000
Allocated common fixed expenses*……. 60,000 18,000 30,000 12,000
Total fixed expenses …………………. 148,000 46,000 66,000 36,000
Net operating income (loss)……………. $ 32,000 $17,000 $ 24,000 $ (9,000)
*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.