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 | $ | 921,000 | | $ | 264,000 | | $ | 403,000 | | $ | 254,000 | |
| Variable manufacturing and selling expenses | | 469,000 | | | 112,000 | | | 200,000 | | | 157,000 | |
| Contribution margin | | 452,000 | | | 152,000 | | | 203,000 | | | 97,000 | |
| Fixed expenses: | | | | | | | | | | | | |
| Advertising, traceable | | 69,200 | | | 8,700 | | | 40,300 | | | 20,200 | |
| Depreciation of special equipment | | 42,800 | | | 20,300 | | | 7,400 | | | 15,100 | |
| Salaries of product-line managers | | 114,300 | | | 40,200 | | | 38,900 | | | 35,200 | |
| Allocated common fixed expenses* | | 184,200 | | | 52,800 | | | 80,600 | | | 50,800 | |
| Total fixed expenses | | 410,500 | | | 122,000 | | | 167,200 | | | 121,300 | |
| Net operating income (loss) | $ | 41,500 | | $ | 30,000 | | $ | 35,800 | | $ | (24,300) | |
|
*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.
