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Extra Practice - Discontinuing Segment - Problem 1 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 Bikes $90,000 (27,000 63,000 Mountain Bikes $150,000 (60,000) 90,000 Racing Bikes $60,000 (33,000 27,000 Total $300,000 (120,000) 180,000 Sales Less variable expenses Contribution margin Less fixed expenses: Advertising Depreciation Product line manager Common allocated costs Total fixed expenses Net income (loss) (10,000) (6,000) (12,000) (18,000) (46,000) $17,000 (14,000) (9,000) (13,000) (30,000) (66,000) $24,000 (6,000) (8,000) (10,000) (12,000) (36,000) ($9,000) (30,000) (23,000) (35,000) (60,000) (148,000) $32,000 *allocated based on 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. Solution Discontinue Racing Bikes Sales Keep Racing Bikes 60,000 (33,000) 27,000 Less variable expenses Contribution margin Less fixed expenses: Advertising Depreciation Product line manager Common allocated costs Total fixed expenses Net Income (loss) (6,000) (8,000) (10,000) (12,000) (36,000) (9,000) Decision: Non-Financial factors: Chapter 8 Lecture - Page 20