The Regal Cycle Company manufactures three types of bicycles—adirt bike, a mountain bike, and a racing bike. Data on sales andexpenses for the past quarter follow:
| Total | Dirt
Bikes | Mountain Bikes | Racing
Bikes |
| Sales | $ | 919,000 | | $ | 262,000 | | $ | 405,000 | | $ | 252,000 | |
| Variable manufacturing and selling expenses | | 462,000 | | | 111,000 | | | 200,000 | | | 151,000 | |
| Contribution margin | | 457,000 | | | 151,000 | | | 205,000 | | | 101,000 | |
| Fixed expenses: | | | | | | | | | | | | |
| Advertising, traceable | | 69,300 | | | 8,900 | | | 40,100 | | | 20,300 | |
| Depreciation of special equipment | | 43,700 | | | 20,400 | | | 7,800 | | | 15,500 | |
| Salaries of product-line managers | | 114,300 | | | 40,000 | | | 39,000 | | | 35,300 | |
| Allocated common fixed expenses* | | 183,800 | | | 52,400 | | | 81,000 | | | 50,400 | |
| Total fixed expenses | | 411,100 | | | 121,700 | | | 167,900 | | | 121,500 | |
| Net operating income (loss) | $ | 45,900 | | $ | 29,300 | | $ | 37,100 | | $ | (20,500) | |
|
*Allocated on the basis of sales dollars.
Management is concerned about the continued losses shown by theracing bikes and wants a recommendation as to whether or not theline should be discontinued. The special equipment used to produceracing bikes has no resale value and does not wear out.
Required:
1. What is the financial advantage (disadvantage) per quarter ofdiscontinuing the Racing Bikes?
2. Should the production and sale of racing bikes bediscontinued?
3. Prepare a properly formatted segmented income statement thatwould be more useful to management in assessing the long-runprofitability of the various product lines.
