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 | $ | 928,000 | $ | 265,000 | $ | 403,000 | $ | 260,000 | ||||
| Variable manufacturing and selling expenses | 460,000 | 112,000 | 197,000 | 151,000 | ||||||||
| Contribution margin | 468,000 | 153,000 | 206,000 | 109,000 | ||||||||
| Fixed expenses: | ||||||||||||
| Advertising, traceable | 70,000 | 8,800 | 40,300 | 20,900 | ||||||||
| Depreciation of special equipment | 43,600 | 20,800 | 7,600 | 15,200 | ||||||||
| Salaries of product-line managers | 115,900 | 40,900 | 38,900 | 36,100 | ||||||||
| Allocated common fixed expenses* | 185,600 | 53,000 | 80,600 | 52,000 | ||||||||
| Total fixed expenses | 415,100 | 123,500 | 167,400 | 124,200 | ||||||||
| Net operating income (loss) | $ | 52,900 | $ | 29,500 | $ | 38,600 | $ | (15,200) | ||||
*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.
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.
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